Fixed mortgage rates are easy to understand: one rate, one payment. If you take out a $500,000 mortgage at 3.99% over 25 years, your monthly payment is going to be the same no matter which lender you go with. Simple, right? 

Variable rates, though? That’s where things get murky. Two lenders could offer you the same rate, with the same amortization and loan amount — yet one ends up costing you more. And that’s before you even consider the fine print. Spoiler alert: the devil’s in the details. 

Too often, borrowers focus on the headline rate and think they’ve landed the best deal. But if you’re not asking the right questions, you could be locking into a more expensive mortgage — and never even know it. 

 

Variable vs. Adjustable: Same Rate, Different Ride 

Let’s clear up a major misconception: not all variable rate mortgages are created equal. There are actually two types: 

  1. True Variable Rate

With this type, your payment stays the same throughout the term. When the rate changes, it affects how much of your payment goes to interest versus principal. 

  • Rate goes up? You pay more interest, less principal. 
  • Rate goes down? You pay more principal, less interest. 

You won’t feel the rate change in your wallet month-to-month, but it affects your progress toward paying down the loan. 

 

  1. Adjustable Rate Mortgage (ARM)

Here, the payment itself changes whenever the prime rate does. If the Bank of Canada drops rates by 0.25%, your payment drops too — and vice versa. 

In a falling rate environment, this flexibility is gold. You can enjoy lower payments or keep payments the same and hammer down your principal faster. Want to free up cash flow to qualify for another property mid-term? An ARM gives you that wiggle room. 

 

Compounding: The Sneaky Cost No One Talks About 

Here’s a little-known truth: not all interest is compounded equally in the world of variable mortgages. 

  • Fixed-rate mortgages? Always semi-annual compounding. 
  • Variable-rate mortgages? Could be monthly or semi-annual, depending on the lender. 

Sounds minor, but it changes the actual cost of the mortgage — even when the rate looks the same on paper. 

Example: $700,000 mortgage at 4.10%, 25-year amortization 

  • Semi-annual compounding: $3,720.19/month 
  • Monthly compounding: $3,733.62/month 

That’s a difference of $13.43/month — not huge, but over five years? That’s over $805. 

And it gets worse as rates go up. At 7.00%, the monthly payment difference jumps to $44.54/month — over $2,670 across a 5-year term. 

Here’s the kicker: A 7.00% rate compounded monthly is equivalent in cost to a 7.1029% rate compounded semi-annually. Yet lenders don’t explain this, and most borrowers never think to ask. 

Some lenders take it a step further and align the compounding period with your payment frequency. Choose biweekly payments? They compound interest biweekly. Weekly payments? You guessed it — weekly compounding. While the cost difference here is smaller than the jump from semi-annual to monthly compounding, it still adds up over time. Most borrowers don’t even realize it’s happening. 

Does this mean you should avoid a variable rate mortgage with monthly compounding? Not necessarily. If that option comes with a lower rate, it can still be the better deal — especially when rates are on the lower side. The lower the rate, the smaller the impact compounding has on your overall cost. If you’re comparing purely on rate, monthly compounding isn’t a dealbreaker — just something to factor into the bigger picture. 

 

The Penalty Trap: Prime vs. Contract Rate

Breaking a mortgage early? (It happens — life changes, investment opportunities come up, rates drop, etc.) You’ll owe a penalty. Most lenders calculate it using your contract rate (the actual interest rate), which makes sense. 

But a few use the prime rate — which is usually higher than your contract rate. That means you pay a higher penalty. 

Example: 

  • Mortgage balance: $450,000 
  • Contract rate: 4.10% 
  • Prime rate: 4.95% 

3 months’ interest penalty: 

  • At contract rate: ~$4,612.50 
  • At prime rate: ~$5,568.75 

That’s an extra $956.25. 

 

Final Thoughts 

Mortgages are not one-dimensional. Rate is important — but it’s just one piece of the puzzle. Payment structure, compounding, terms, prepayment flexibility, and penalties all impact your long-term cost. 

A seemingly “better deal” can easily turn out to be a worse one — especially when you’re only looking at the surface. Ask deeper questions. Read the fine print. Check out my blog on Why You Should Never Choose a Mortgage Based on Rate Alone. Or better yet, work with someone who already has and will take the time to explain these things to you.  

Curious whether your mortgage deal is really the best? Let’s take 15 minutes and find out. Contact us today to find out your lowest mortgage rate options.