When most people shop for a variable rate mortgage, they usually focus on one thing: the rate itself.
“Who has the lowest variable rate?”
But here’s the thing most borrowers don’t realize; two variable rate mortgages with the exact same rate can still cost very different amounts over time.
Depending on the lender, one variable mortgage can also give you way more flexibility than another.
Variable rates are one of the most misunderstood mortgage products in Canada because there are a lot of small details hidden behind the advertised rate that lenders do not mention to the borrower. Those details can impact your payment, your interest costs, your penalties, and even your ability to switch to a fixed rate later on.
Adjustable Rate vs. True Variable Rate
Not all variable mortgages work the same way.
There are generally two types:
Adjustable Rate Mortgage (ARM)
With an adjustable rate mortgage, your payment changes whenever prime rate changes.
If rates go down, your payment drops.
If rates go up, your payment increases.
This keeps your amortization more stable because the payment adjusts immediately.
True Variable Rate Mortgage
With a true variable rate mortgage, your payment usually stays the same for the entire term.
Instead of the payment changing, the amount going toward principal vs. interest changes.
If rates rise:
- More of your payment goes toward interest
- Less goes toward principal
If rates fall:
- More goes toward principal
- Less goes toward interest
A lot of borrowers prefer stable payments, but there are important risks that come with this structure that many people don’t fully understand.
Trigger Rates and Trigger Points
This mainly applies to variable mortgages where the payment stays fixed.
As interest rates rise, more and more of your payment gets eaten up by interest.
Eventually, you can hit something called a trigger rate.
That’s the point where your entire payment is only covering interest and none of it is paying down principal anymore.
If rates rise even further, you can hit the trigger point, where the lender might require action from you.
Depending on the lender, this could mean:
- Increasing your monthly payment
- Making a lump sum prepayment
- Re-amortizing the mortgage
- Potentially being forced into higher payments
This caught a lot of borrowers off guard during the recent rate hike cycle back in 2022, where rates jumped up over 2% and people were hitting their trigger point. This jumped a lot of peoples’ amortizations up to as high as 45 years!
Interestingly, some lenders try to reduce the chances of this happening.
For example, lenders like Meridian Credit Union sometimes structure variable mortgage payments slightly higher than the minimum required payment — they base your payments at a 1% higher rate to create a buffer and help reduce the risk of hitting a trigger point later.
Same Rate, Different Payment
Here’s something even more surprising. Two lenders can offer the exact same variable rate, but one can still cost more than the other. This is because of how the interest is compounded.
Most lenders use monthly compounding(like TD) on variable rates. Some use semi-annual compounding(like Scotia/MCAN).
That difference changes the effective borrowing cost.
Let’s use an example:
- Mortgage amount: $500,000
- Amortization: 25 years
- Rate: 4.35%
Monthly Compounding
Payment: $2,736.76
Semi-Annual Compounding
Payment: $2,725.82
Same mortgage amount.
Same amortization.
Same advertised rate.
Yet one payment is about $10 higher every month.
Over time, that adds up.
The higher rates go, the bigger this difference becomes.
Some Lenders Compound Even More Frequently
This is another detail almost nobody talks about.
Some lenders, like Royal Bank of Canada, may match the compounding period to your payment frequency.
So if you choose:
- Biweekly payments → interest compounds biweekly
- Weekly payments → interest compounds weekly
That slightly increases the overall borrowing cost compared to monthly or semi-annual compounding.
The difference is not massive, but it still exists, and very few borrowers are aware it’s happening. This drives up your borrowing cost even further, so when comparing 2 of the same rate offers but one has a quicker compounding frequency(like RBC), that will almost always end up costing you more than the longer compounding frequency option. The difference can effectively be as much as .05% per year on the rate.
Variable Rate Penalties Are Different Too
A lot of people choose variable rates because they’ve heard the penalties are lower than fixed rates, but even variable rate penalties can vary significantly between lenders.
Most variable mortgages use a 3-month interest penalty, but the way that interest is calculated differs.
For example:
- Some lenders calculate the penalty using your contract rate
- Others calculate it using the lender’s prime rate
That difference can be substantial.
Let’s say you have:
- $500,000 mortgage
- Prime – 0.60%
- 25-year amortization
With TD, the penalty could be roughly $4,773 because they calculate it using the contract rate.
With Scotiabank, the same mortgage could have a penalty closer to $5,511 because they base it off prime rate. This is regardless of the rate that Scotia offers, even if it was Prime – 0.80%; your penalty will still be $5,511.
That’s about a $738 difference.
So if you think there’s a decent chance you’ll break the mortgage early, refinance, move, or sell soon, the lender’s penalty calculation can matter almost as much as the rate itself.
Sometimes taking a slightly higher variable rate with a lender that has a cheaper penalty structure can actually save you more money overall.
Converting From Variable to Fixed
Another thing many borrowers overlook is conversion flexibility.
Some lenders give you far more options than others when switching from variable to fixed.
For example, TD allows borrowers to convert into virtually any fixed term length.
So if you have:
- 4 years remaining on your variable term
You could still switch into:
- A 3-year fixed
- A 2-year fixed
- Or another shorter-term option
That can be extremely valuable if rates drop later or if you want flexibility sooner.
Other lenders are much stricter.
Some only allow you to convert into:
- A fixed term equal to the remaining term length
- Or longer
So if you have 4 years left, you may be forced into a minimum 4-year fixed.
Some lenders only allow conversion into a 5-year fixed.
If your long-term strategy involves potentially switching from variable to fixed later, this flexibility matters a lot.
The Lowest Rate Isn’t Always the Cheapest Mortgage
This is why comparing mortgages purely by rate can be misleading.
You need to look at:
- How the payment structure works
- Compounding method
- Trigger rate risk
- Penalty calculations
- Conversion flexibility
- Payment structure
- Overall mortgage features
Sometimes the “cheapest” advertised variable rate can actually end up costing more in the long run.
Having a seasoned broker who looks at, and can explain all of the nuances of the product to you, so it fits your goals/strategy, is vital in todays’ market.
