Does the lower mortgage rate always cost less? (Canada)

Not always: in Canada, the lower rate costs less only if you keep the mortgage for the full term or the rest of the offer is equally good. If you sell, move or refinance before the term ends, a harsher penalty method can cost more than the lower rate saved. So compare the rate together with the penalty, the prepayment room, portability and how long you expect to keep the mortgage.

What the rate does not show

Your term is the length of the contract, often five years. The rate sets your payment during the term; other lines of the offer decide what leaving early costs:

The penalty method. On a fixed mortgage the penalty is usually the higher of three months' interest or the interest rate differential (IRD), which compares your rate with the lender's current rate for the time left. Lenders may use posted rates, and your contract governs (source: Financial Consumer Agency of Canada, checked October 2026); see why posted rates can make the IRD larger.
Prepayment privileges. How much you can add to your payments or pay as a lump sum each year; paying more than the maximum means a penalty (source: Financial Consumer Agency of Canada, checked October 2026).
Portability. Whether you can move the mortgage to your next home, within the lender's time limits, depends on the lender.
Cash back. Some lenders offer cash back or fee coverage, part of which may be repayable if you break early.

What happens if you sell in year 3 of a 5-year term

Illustrative, not a quote. Figures are rounded and the penalty calculation is simplified.

You borrow $500,000 over 25 years on a five-year fixed term. Offer A has a rate 0.15 percentage points lower than Offer B. Offer A's IRD is worked out from posted rates, minus the discount you received when you signed. Offer B's IRD uses the rate the lender offers today, with no discount subtracted. You sell after three years.

What you compare	Offer A: rate 0.15 points lower, IRD from posted rates	Offer B: rate 0.15 points higher, IRD from today's rate
Interest over 3 years	about $2,200 less ($500,000 × 0.0015 = about $750 a year, a little less each year as the balance falls)	about $2,200 more
Balance at the sale, with two years left	about $465,000	about $465,000
Comparison rate for the IRD	1.00 point below your rate (today's posted two-year rate minus your original discount)	0.40 points below your rate (the lender's two-year rate today)
IRD	$465,000 × 0.01 × 2 years = about $9,300	$465,000 × 0.004 × 2 years = about $3,700
Three months' interest	about $5,000	about $1,730 × 3 = about $5,200
Penalty (the higher of the two)	about $9,300	about $5,200
Net when you sell at year 3	about $1,900 more ($9,300 − $5,200 − $2,200)	about $1,900 less
Net if you keep it all five years	about $3,600 less, no penalty	about $3,600 more

Kept for all five years, Offer A would have saved about $3,600 with no penalty. The lower rate suited a different plan. If you buy another home, porting the mortgage, where the lender allows it, may avoid the penalty altogether.

When the lower rate does cost less

The lower rate generally costs less when:

you expect to keep the mortgage to the end of the term;
both offers use the same penalty method and privileges; or
the rate gap is wide enough to absorb a possible penalty.

A variable-rate penalty is commonly three months' interest, though the contract governs. The smaller variable penalty is one reason people who might move weigh fixed or variable.

What to do next

Put two offers side by side over the years you expect to keep the home with the total cost of holding tool; results are estimates only, not an offer or advice. Or use our call-back form and bring your plan, not just the rate.

Common follow-up questions

How do I find out which penalty method an offer uses?

Read the prepayment section of the commitment letter before you sign, and ask how the comparison rate is set. Once you have the mortgage, federally regulated lenders give yearly information on how the charge is calculated, and a written statement of the charge on request (source: Financial Consumer Agency of Canada, Code of Conduct, checked October 2026).

Is a slightly higher rate worth it for a mortgage I can move?

A slightly higher rate can be worth it, if a move during the term is likely. Ask how long the lender allows between selling and buying, and whether you can add money. See how long your term should be if you might move.

Does the same apply at renewal?

Yes. Switching at the end of a term carries no prepayment penalty. But the new term has its own penalty method and privileges, so compare those along with the rate. Our page on whether switching for 0.2% is worth it shows the rate side of that choice.