One notable advantage of getting a variable-rate mortgage is that it can be switched to a fixed-rate mortgage in the middle of your term without triggering any penalties. Making this type of switch can result in more affordable monthly mortgage payments if variable rates rise and push your finances into the red zone.
Like any mortgage decision, switching from a variable rate of interest to a fixed rate during your term requires some thought to ensure you’re making the right move.
What’s the difference between variable and fixed mortgage rates?
With a variable-rate mortgage, the interest rate fluctuates based on changes to the lender’s prime rate, which itself is determined by the Bank of Canada’s overnight rate. If the overnight rate rises or falls, prime rates follow suit and take variable mortgage rates along for the ride.
With a fixed-rate mortgage, the interest rate is set for the duration of your mortgage term — no matter what happens to rates or the economy in general.
When to switch your mortgage rate from variable to fixed
When the economy is stable, variable mortgage rates are typically lower than fixed rates. But if interest rates rise, you can wind up paying far more for your variable-rate mortgage than you budgeted for. In these cases, switching to a fixed mortgage rate can be a strategic hedge against even higher costs.
But timing a rate switch can be tricky. You shouldn’t necessarily switch to a fixed rate just because your variable rate has risen once or twice, especially if you’ve been stress tested and your finances can handle these moderate increases.
Switching to a fixed-rate mortgage makes the most sense if:
- Variable rates are expected to increase rapidly.
- Variable rates become higher than posted fixed rates.
- Variable rates could stay elevated for an extended period of time.
- Further rate increases will make it difficult for you to afford your mortgage payments or other necessities.
Note that most of these scenarios require insight into where mortgage rates could be heading. Speak with your lender or mortgage broker to get a professional’s take on future rate activity and how a rate switch might affect you.
Having a discussion about future mortgage rates should inform your initial ‘fixed versus variable’ decision. But remember that rate movements are hard to predict. Just ask anyone who took out a variable rate mortgage before the Bank of Canada raised its overnight rate eight times between March 2022 and January 2023 — and again on June 7.
How to switch from a variable- to fixed-rate mortgage
Switching mortgages to get a new rate type is relatively simple. It shouldn’t take more than a phone call to your lender or broker, who will then arrange the switch for you.
Your new mortgage rate will depend on two factors: how much time you have left on your mortgage term and your lender’s current, posted fixed mortgage rates.
If you have a five-year term that has two years left on it, for example, your rate will be based on your lender’s two-year fixed mortgage rates. You’ll be charged the posted rate for that product, which will generally be higher than the special rates offered to entice borrowers.
Switching lenders to secure a lower rate, more favourable terms or better service, however, is a much bigger deal. In that case, you’d have to break your mortgage contract, refinance and be charged a prepayment penalty.
Pros and cons of switching from variable to fixed
Pros
- Future savings. If variable rates are expected to rise and stay elevated, switching to a fixed-rate mortgage can reduce the amount of interest you’ll pay..
- More stability. The primary risk of a variable-rate mortgage is that you never know how much interest you’ll be paying from one Bank of Canada rate decision to the next. With a fixed-rate loan, you’ll know what your mortgage cost will be for the entirety of your term.
- Better cash flow. If your variable rate increases dramatically during your mortgage term, switching to a lower fixed rate could mean a smaller monthly mortgage payment and more cash for you to work with.
Cons
- No upside risk. When you switch from variable to fixed, there’s no going back. If variable rates reverse to the point where they’re lower than your new fixed rate, you won’t be able to switch back to a variable rate.
- Potential penalties. If your mortgage remains unaffordable after making the switch to a fixed-rate loan, making changes will mean breaking your mortgage and paying a prepayment penalty. These penalties tend to be much higher for fixed-rate mortgages than they are for variables.
- Modest savings. Your new fixed rate will be based on the lender’s posted rates, not its special advertised rates. If those posted rates are high, your new mortgage may not provide the financial breathing room you’re hoping for.
Alternatives to switching from variable to fixed
Ride it out until renewal
If you’re able to afford your mortgage payments despite paying more in interest, it might be better to keep your variable-rate mortgage until the end of its term.
By waiting until it’s time to renew your mortgage, you’ll avoid having to pay your lender’s posted rate, which may be comparable or even higher than your current variable rate. You’ll also be able to renew with a new lender without having to break your mortgage.
Refinance
A variable-rate mortgage will typically be less expensive to break and refinance than a fixed-rate mortgage. Breaking a variable typically triggers a prepayment penalty equal to three months’ interest.
This moderate penalty can make refinancing your mortgage — for a lower rate, a longer amortization period or features that allow you to pay it off faster — a better option than switching, but there will be administrative and home appraisal fees to pay.
Frequently asked questions about switching a mortgage from variable-rate to fixed-rate
Can I switch my mortgage from a variable-rate to a fixed-rate?
In most cases, you should be able to switch your mortgage from a variable to a fixed interest rate at any time during your mortgage term without being charged a penalty.
Should I switch to a fixed-rate mortgage?
Switching from a variable- to a fixed-rate mortgage can help make your mortgage more affordable if fixed rates are noticeably lower than variables, and if you’re reasonably sure you won’t need to break your new fixed-rate mortgage contract. Doing so can trigger steep prepayment penalties.
About the Author
Clay Jarvis
Clay Jarvis is NerdWallet’s mortgage and real estate expert in Canada. Thus far, his entire professional writing career has revolved around real estate. Prior to joining NerdWallet, he was the…
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