Variable rates have been the popular choice this year. Some brokers report that more than 60% of their clients chose variable, because it came in a full percentage point or more below fixed. Now the Bank of Canada has started raising rates, and markets expect more increases. If you have a variable mortgage, you may be wondering whether it’s time to lock in. Here’s how to decide.
What locking in means
Most variable-rate mortgages let you convert to a fixed rate partway through your term, usually without a penalty. You’ll get the lender’s current fixed rate, often for a term at least as long as the time you have left. Once you lock in, you can’t go back to variable until your next renewal.
The case for locking in
- Payment certainty. If your budget can’t absorb more increases, a fixed payment removes the guesswork.
- Protection from more hikes. Markets have been pricing in roughly 1% of increases over the next 12 months, though no one knows for sure.
- Peace of mind. If rate news keeps you up at night, that’s worth something.
The case for staying variable
- You may already be ahead. If your variable rate is well below today’s fixed rates, it could take several hikes before fixed costs less.
- Fixed rates have already risen. Lenders raised fixed rates through the fall as bond yields climbed. Locking in now means paying today’s higher price for certainty.
- Lower penalties. Variable mortgages usually charge three months’ interest to break. Fixed rates can cost much more if you sell or refinance early.
- Rates can fall too. If the Bank later cuts, variable borrowers benefit right away.
Five questions to help you decide
- How much higher is the fixed rate I’d get today? That gap is the cost of certainty.
- How many hikes would it take to wipe out that gap? Each 0.25% increase raises a $500,000 adjustable payment by about $69 a month.
- Could my budget handle another 0.50% to 1% increase?
- Do I have a fixed payment? If so, how close am I to my trigger rate?
- Might I sell, move or refinance before my term ends? If yes, the lower variable penalty matters.
Other options to consider
- Increase your payment voluntarily. Paying a little more now puts more toward your balance and builds a cushion against future increases.
- Make a lump-sum prepayment within your annual limit to reduce what’s exposed to rate changes.
- Ask about a hybrid, if your lender offers one, which splits your mortgage between fixed and variable.
How I help
I’ll compare your current rate with the fixed rate you’d get from your lender, show you how many hikes it would take for locking in to pay off, and check whether your plans make the penalty difference matter. Then you can decide with real numbers in front of you.
Read more in my guides to fixed vs. variable rates and the Bank of Canada’s October rate hike.
Frequently asked questions
Should I lock in my variable rate after the rate hike?
It depends on the gap between your variable rate and today’s fixed rates, your budget and your plans. Locking in makes sense if you can’t absorb more increases. Staying variable can make sense if your rate is well below fixed and you might break your mortgage early.
What rate will I get if I lock in?
You’ll usually get your lender’s current fixed rate for a term at least as long as the time left on your mortgage. Ask for their best rate, not just the posted one, since some lenders will negotiate.
Is there a cost to lock in a variable rate?
Most lenders let you convert a variable rate to a fixed rate without a penalty. The real cost is that today’s fixed rates may be higher than your current variable rate.
What happens to my penalty if I lock in?
Once you lock in, you’re on a fixed rate, so breaking your mortgage early would usually cost the greater of three months’ interest or the interest rate differential, which can be much higher than a variable penalty.
Can I increase my variable payment instead of locking in?
Yes. Many lenders let you increase your regular payment, which puts more toward your balance and gives you a buffer if rates keep rising.
Next step
Every situation is a little different. If you’d like to talk through yours, book a consultation or read more about my renewal and switch service.
This guide is general information, not financial or legal advice. Rules, programs and rates change, so please confirm current details with me or the official sources linked above.