Convertible Mortgages in Canada: Switching From Variable to Fixed Mid-Term

A convertible mortgage lets you start on a variable rate and lock into a fixed rate partway through the term if rates start rising or you want a steady payment. This guide covers how conversion works, what it costs and how it compares with breaking the mortgage instead. It’s one of the rate-type guides in the mortgage types and features hub; whether to choose variable in the first place is covered in fixed vs variable.

How conversion works

Conversion is a feature of the mortgage contract, not a right every variable mortgage has. What the feature allows, and the conditions that usually come with it:

• Your mortgage needs a convertibility feature; FCAC suggests asking your lender whether it offers one.
• With that feature, you can convert to a fixed rate at any time during the term.
• You usually have to pay a fee to convert.
• Certain conditions may apply.
• The new fixed rate may be higher than the variable rate you've been paying.
• At some lenders a converted mortgage stays fixed for the rest of the term; RBC, for example, says you can't return to a variable rate during that term.

In practice:

Before relying on the feature, it’s worth asking your lender three things: which fixed terms you can convert into (some require a term at least as long as the time left on your current one), whether a fee applies, and how the conversion rate is set.

The conversion rate: the hidden cost

The rate offered on conversion isn’t always the rate a new borrower would be offered for the same term. If your lender converts at its posted rate, or close to it, the gap over the rest of the term can cost more than breaking the mortgage and starting again elsewhere with a three-month-interest penalty.

The penalty methods are explained in how mortgage penalties are calculated, and the mortgage penalty calculator estimates yours.

When converting tends to make sense

Convert or break: how to compare them

When you want a fixed rate, there are two routes. Working out both before deciding shows which is cheaper.

Option 1, convert: pay the conversion rate on the remaining balance for the remaining term, plus any conversion fee.

Option 2, break and start again: pay the penalty (usually three months’ interest on a variable rate), any legal or discharge costs, and then the new, lower fixed rate for the same period.

If the interest saved at the lower rate over the remaining term is more than the penalty and costs, breaking is cheaper. One way to see it is a break-even period:

$$\text{Break-even (months)} = \frac{\text{Penalty and costs}}{\text{Monthly interest saved at the lower rate}}$$

If the break-even period is shorter than the time left on the term, breaking costs less than converting. The mortgage break-even calculator guide works through the comparison in more detail.

Short-term convertible fixed mortgages

Some lenders also offer a short fixed term, often one year, that can be converted into a longer fixed term at any point during that year. The starting rate is usually higher than a standard one-year fixed, in exchange for the option. It’s a bet that rates will fall within the year: if they do, you lock in lower; if they rise instead, a longer fixed term taken at the start would have cost less.

Planning a conversion

• Know the conversion rate in advance. Asking before signing what fixed rate you would get if you converted today, and comparing it with the rate offered to new borrowers, shows how the lender prices conversions.
• Do the break-even sum at the point you’re considering it, not only at signing.
• Decide on a trigger in advance, such as a spread or a rate level at which you would convert, so the decision isn’t made in the middle of a rate scare.
• Watch bond yields. Fixed mortgage rates follow bond yields rather than the Bank of Canada’s rate, so rising yields usually mean fixed rates are about to rise; see how bond yields affect mortgage rates.

If you’re on a fixed-payment variable mortgage close to its trigger rate, converting is one of the ways out; the others are covered in negative amortization.