Should You Switch to a Fixed Rate for the Rest of Your Mortgage Term?

One notable advantage of a variable-rate mortgage is that you can switch to a fixed-rate mortgage in the middle of your term without triggering any penalties. Switching allows you to lock in affordable monthly mortgage payments. If variable rates rise, higher payments could 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.

Variable and fixed mortgages: What's the difference?

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

Switching to a fixed-rate mortgage makes the most sense if:

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.

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:

If you have a five-year term that has two years left on it, for example, your rate will be based on your current 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 before your term is up 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

Alternatives to switching from variable to fixed

Ride it out until renewal

If you can afford mortgage payments despite the 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 paying 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 is typically 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.