Should You Switch From a Variable-Rate to a Fixed-Rate Mortgage?

How do I decide which option is right for me?

Deciding which option is right for you depends on a few things, including whether interest rates will continue to rise in the future, whether you’re prepared to take that risk, and what you need from your mortgage.

Let’s compare all three options, assuming you currently have a variable-rate mortgage with a rate of Prime minus 1.20% (starting at 1.25% and currently 4.25%), fixed payments which you’ve already voluntarily raised to $2,800 per month, a balance of $500,000, 3 years remaining in your term, and a remaining amortization of 23 years.

Mortgage balance	Monthly payment	Mortgage rate	Term remaining	Amortization remaining
$500,000	$2,800	4.25%	3 years	23 years

Now, let’s use Ratehub’s mortgage payment calculator to consider a few scenarios: one in which rates rise moderately; and one in which rates rise rapidly.

Scenario 1: Rates rise moderately

Let’s compare your three options based on the assumption that rates will continue rising moderately, adding 25 basis points every 3 months over the next year before levelling off at 5.25%.

If you choose to convert your existing mortgage, you’ll lock in to a 3-year fixed rate of 5.74%.

If you choose to refinance, you’ll be able to get the best 3-year fixed mortgage rate in Canada of 4.39% at a cost of approximately $6,650 in penalties and fees. [Note: This assumes a pre-payment penalty of approximately $5,300 (three months’ simple interest), a discharge fee of $350, and lawyer fees of $1,000.]

And if you choose to keep your mortgage, you’ll see your interest rate rise from 4.25% to 5.25% over the coming year.

	Convert existing mortgage	Refinance	Keep existing mortgage
Mortgage rate	5.74% fixed	4.39% fixed	Rising from 4.25% to 5.25%
3-year cost of borrowing	$82,311	$62,739	$72,752
Penalties and fees	$0	$6,650	$0
Total cost	$82,311	$69,389	$72,752
Monthly payment	$3,247	$2,870	$2,800
Balance owing at renewal	$465,416	$459,433	$471,139

In this scenario, you’ll save some money by refinancing your mortgage, but not a lot. Your payment will rise by $70 per month, but you’ll pay $3,363 less in interest and pay off just over $11,700 more than you would by keeping your existing mortgage.

At the same time, converting to a fixed-rate mortgage with your current lender would actually put you in a worse position. Your payment would go up by almost $450 per month and your cost of borrowing would increase by almost $10,000.

Scenario 2: Rates rise rapidly

Let’s try again assuming rates will rise rapidly, adding 50 basis points every 3 months over the next year before levelling off at 6.25%.

	Convert existing mortgage	Refinance	Keep existing mortgage
Mortgage rate	5.74% fixed	4.39% fixed	Rising from 4.25% to 6.25%
3-year cost of borrowing	$82,311	$62,739	$84,403
Penalties and fees	$0	$6,650	$0
Total cost	$82,311	$69,389	$84,403
Monthly payment	$3,247	$2,870	$2,800
Balance owing at renewal	$465,416	$459,433	$483,602

In this scenario, you stand to save a lot more by refinancing your mortgage. You’ll save $15,000 in interest and be over $24,000 closer to paying off your mortgage after three years.

Converting your existing mortgage also appears beneficial. But what if you voluntarily raise your payment to match what you would pay if you converted?

	Convert existing mortgage	Refinance	Keep existing mortgage
Mortgage rate	5.74% fixed	4.39% fixed	Rising from 4.25% to 6.25%
3-year cost of borrowing	$82,311	$62,739	$84,850
Penalties and fees	$0	$6,650	$0
Total cost	$82,311	$69,389	$82,889
Monthly payment	$3,247	$2,870	$3,247
Balance owing at renewal	$465,416	$459,433	$465,997

Refinancing is still the best option in this situation, as it stands to save you $13,500 in payments and an additional $13,500 in interest over three years. But converting your existing mortgage to a fixed rate leaves you with roughly the same outcome as doing nothing at all.

What else do I need to know about switching from a variable-rate to fixed mortgage?

There are a few things to keep in mind if you’re thinking about switching your variable-rate mortgage to a fixed rate one:

• Switching from variable to fixed is easy. Switching from fixed to variable is hard. If you switch to a fixed-rate mortgage, it might not be so easy to switch back. The penalty for breaking a fixed-rate mortgage can be much higher than the penalty for breaking a variable-rate mortgage, especially when mortgage rates are going down.

• Refinancing requires you to pass the stress test. To refinance your mortgage, you’ll need to qualify at a rate of at least 2% higher than what’s in your contract. If you don’t qualify for a new mortgage, you’ll be forced to stay with your old lender. For that reason, you may want to consider refinancing sooner than later if you believe mortgage rates will continue to rise.
• Falling property values also affect mortgage affordability. In most cases, you can only take out up to 80% of the value of your home when you refinance. If your property value has fallen to the point where you can’t access enough equity to pay off your existing mortgage, refinancing will be a challenge.
• Your monthly payment doesn’t tell the whole story. While cash flow is important, the amount of interest you pay is what makes your mortgage expensive. Make sure you’re taking the cost of borrowing into account, as well as the length of time it will take you to pay off your mortgage.
   

How can I go about switching my variable-rate mortgage to a fixed-rate mortgage?

If you’re still thinking about switching from a variable-rate mortgage to a fixed-rate mortgage, there are a few steps to take.

1. Get in touch with your current mortgage lender. Let them know you’re thinking about making the switch and find out what your mortgage would look like. Be sure to ask about the monthly payment, interest rate and total cost of borrowing. Use the opportunity to ask about the cost of breaking your mortgage including any fees.
2. Speak with a mortgage broker. A mortgage broker can help you understand your options and decide whether refinancing makes sense for you. They can also help you get pre-approved for a new mortgage and give you a clear picture of what you qualify for.
3. Consider your needs. Give some thought to what’s important to you in a mortgage. Are you willing to make higher payments in exchange for better outcomes later on? How much would you need to save in interest to make refinancing worthwhile? Will you regret locking in a fixed rate if it ends up costing you more in the long run?
4. Make the call. While it’s impossible to make this decision with perfect information, use what you know to make an informed decision and take action. Work with your lender or mortgage broker to make the changes you need to ensure your mortgage works for you.
   
   

The bottom line

Locking in a fixed mortgage rate can help bring stability in a time of rising interest rates, but the best choice for you depends on your unique situation and your appetite for risk. You may decide that the peace of mind a fixed-rate mortgage and its stability give you are worth paying a little extra. Work with your lender and a mortgage broker to gather as much information as you can, and carefully weigh your needs and options before making a decision.

Also read: 

• The Trigger Rate: Everything You Need to Know
• The New Tax-Free First Home Savings Account
• Mortgages and Inflation: How Do They Affect Each Other?
• The Bank of Mom and Dad and Your Down Payment
• How Does the Rising Stress Test Impact Mortgage Affordability?