Variable to Fixed Rate Conversion: Conditions and Optimal Timing

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Converting a variable-rate mortgage to a fixed rate is a contractual privilege offered by most Canadian lenders, but its conditions vary considerably from one institution to another. In Quebec, this option is particularly relevant when interest rates are rising and the borrower wishes to stabilize their payments. The conversion is generally performed without a prepayment penalty, but the fixed rate offered is not the prevailing market rate at the time of conversion: the lender typically offers their posted rate for a term whose duration matches the remaining time on the current variable term, or a standard term at the lender's discretion. It is therefore essential to compare the conversion rate offered with rates available from other institutions. In some cases, it may be more advantageous to break the variable-rate mortgage (penalty of only three months' interest) and refinance with another lender at a better fixed rate, rather than accepting the conversion rate from your current lender. An AMF-certified mortgage broker can analyze both scenarios and recommend the most cost-effective option. The optimal timing for conversion depends on several factors, including the Bank of Canada's outlook on the policy rate, the spread between the current variable rate and the proposed fixed rate, and the borrower's risk tolerance.

Variable to Fixed Rate Conversion: Understanding Your Options

When interest rates rise, many Quebec borrowers holding variable-rate mortgages feel the anxiety of watching their payments climb month after month. Converting to a fixed rate represents a lifeline of stability, allowing them to lock in a predictable rate for the remainder of their term or for a new full term. However, this decision should not be made in a panic: the fixed rate offered upon conversion is not always competitive, and better alternatives sometimes exist.

How the Conversion Privilege Works

The conversion privilege is a clause included in the majority of variable-rate mortgage contracts in Canada. It allows the borrower to switch from a variable rate to a fixed rate with the same lender without having to pay a prepayment penalty. The new fixed rate is determined by the lender at the time of the conversion request, not at the time of the original loan signing. The duration of the new fixed term generally corresponds to the time remaining on the original variable term, although some lenders offer the option of choosing a new standard term.

Conversion Privilege: A contractual clause allowing a variable-rate mortgage holder to switch to a fixed rate with the same lender without prepayment penalty. The fixed rate offered is set by the lender at the time of the request and corresponds to their prevailing rate for the applicable term.

The Conversion Rate Trap: Why Comparing Is Essential

The main disadvantage of an internal conversion is the rate offered. Lenders typically propose their posted rate or a slightly discounted rate, which is often well above the negotiated rates available on the market. For example, if the posted rate for a 5-year term is 6.49% but negotiated rates are around 4.89%, the borrower who accepts the internal conversion pays a substantial premium. In this scenario, it may be financially more advantageous to break the variable-rate mortgage, pay the three-month interest penalty (typically much lower than the interest rate differential on a fixed-rate loan), and refinance with a lender offering a better rate.

Comparative Analysis: Internal Conversion vs External Refinancing

Obtain the internal conversion rate: Contact your lender to find out the exact fixed rate you would be offered upon conversion. Note the proposed term and associated conditions.
Calculate the cost of external refinancing: Estimate the three-month interest penalty on your current balance, add notary fees ($1,000 to $2,000 in Quebec), appraisal fees ($300 to $500), and discharge fees if applicable ($400 to $800).
Compare the monthly savings: Calculate the difference in monthly payment between the internal conversion rate and the best fixed rate available elsewhere. Multiply this savings by the number of months in the new term.
Déterminé the break-even point: Divide the total cost of external refinancing by the monthly savings. If the break-even point is less than 18 to 24 months and the new term is 5 years, external refinancing is likely the better option.

Frequently Asked Questions

Can I convert my variable rate to a fixed rate at any time?

Most Canadian lenders offer a conversion privilege within the variable-rate mortgage contract. However, the terms vary: some lenders allow conversion at any time, while others impose a minimum waiting period after initial disbursement. Check your mortgage contract clauses or consult your AMF-certified broker.

What fixed rate does the lender offer upon conversion?

The lender typically offers their posted rate (or a slightly reduced rate) for a term matching the remaining duration of your variable term, or a standard 3, 4, or 5-year term. This rate is often higher than negotiated rates available from other lenders, which is why comparing before accepting is important.

Are there fees to convert from variable to fixed?

Converting with the same lender is usually free of charge and penalty-free. This is one of its key advantages. However, if you choose to break your variable mortgage to refinance elsewhere at a better fixed rate, you will need to pay the three-month interest penalty, notary fees, and any discharge fees.

Is it better to convert or to break my variable mortgage?

It depends on the spread between the conversion rate offered by your lender and the fixed rates available elsewhere. If another lender offers a significantly lower rate, the savings over the new term may well outweigh the three-month interest penalty and notary fees. A mortgage broker can calculate the break-even point for both scenarios.

When is the optimal time to convert from variable to fixed?

The ideal time is when markets anticipate sustained increases in the Bank of Canada's policy rate. Key indicators to watch include Bank of Canada communications, inflation (CPI), the labour market, and 5-year bond yields, which directly influence fixed mortgage rates.