A rate buydown means paying your lender money up front in exchange for a lower interest rate. You are effectively prepaying part of the interest. This page, part of the mortgage rates hub, explains how buydowns work, how to test a lender’s offer with a break-even calculation, and how the same money could be used instead.
Buydowns and discount points
In the United States the practice is formalized as discount points. The Consumer Financial Protection Bureau explains that “points lower your interest rate, in exchange for paying more at closing”, that “one point equals one percent of the loan amount”, and that “the amount that your interest rate is reduced depends on the specific lender, the kind of loan, and the overall mortgage market.”
In Canada, whether a lender will lower your rate for an upfront payment, and at what price, is up to the lender. Before paying for a lower rate, it is worth asking for a lower rate without paying: the FCAC notes that “you may be able to negotiate a lower rate with your lender” and that “a discounted rate is lower than the lender’s posted rates.” How to get the best mortgage rate covers comparing offers.
A fee paid to a bank for a lower rate is part of the cost of borrowing, so it raises the APR above the interest rate. The federal rules for banks define that cost of borrowing. It includes the interest or discount on the loan over its term. The APR is the cost of borrowing expressed as an annual rate on the principal; when interest is the only cost, the APR is the annual interest rate. The APR vs interest rate page explains how that works, and basis points explains how rate reductions are usually quoted.
Working out the break-even
What a lower rate saves has two parts: lower payments, and a lower balance at any point, because more of each payment goes to principal. The saving to date is the payment gap so far plus the balance difference, and the break-even is the month that saving catches up with the upfront cost. Dividing the cost by the payment gap alone ignores the balance difference and gives a later month.
Example: $5,000 to lower the rate on a $500,000 mortgage from 4.50% to 4.25%, 25-year amortization, 5-year term. The price and rates are illustrative, not a lender’s quote; payments are monthly, compounded semi-annually.
The payment falls from $2,767 to $2,698 a month, a gap of $69. Cost Γ· payment gap gives 72 months, past the end of the 60-month term. Counting the lower balance too:
| After | Payment gap so far | Lower balance | Saving to date | Cost |
|---|---|---|---|---|
| 12 months | $829 | $394 | $1,223 | $5,000 |
| 24 months | $1,658 | $777 | $2,435 | $5,000 |
| 36 months | $2,486 | $1,146 | $3,632 | $5,000 |
| 48 months | $3,315 | $1,500 | $4,815 | $5,000 |
| 60 months | $4,144 | $1,837 | $5,981 | $5,000 |
By the end of the term the saving is $981 more than the $5,000 paid. A higher price or a smaller rate cut moves the break-even later, and selling, refinancing or switching sooner makes it less likely you reach it.
Two things decide whether the break-even matters:
- How long you keep this mortgage. Selling, refinancing or switching lenders before the break-even means paying more than the lower rate returned, plus any prepayment penalty for breaking the term.
- The term. The lower rate lasts only until renewal, when a new rate is set. Savings after the term depend on a rate nobody knows in advance; see interest rate forecasts for what forecasters expect. A longer term gives the lower rate more months to pay back the cost. For longer terms, the Interest Act also limits what paying off early can cost once the first years have passed: Under section 10 of the Interest Act, a mortgage that isn't due until more than 5 years after its date can be paid off at any time after those 5 years with no more than 3 months' further interest; this doesn't apply to a mortgage given by a company or other corporation.
The same saving-to-date method is used for breaking a mortgage on the break-even calculation page.
A buydown or a bigger down payment?
The same money could reduce the amount you borrow. A bigger down payment lowers the balance for the whole amortization, while a buydown lowers the rate only for the term. One way to compare them over the term is the total of the payments you make plus the balance still owing at the end, plus the upfront money.
Example: three ways to use $5,000 on the same $500,000 mortgage (25-year amortization, 5-year term, illustrative rates). Each total is the upfront money + 60 monthly payments + the balance owing after 60 months.
| Option | Upfront | 60 monthly payments | Balance after 60 months | Total |
|---|---|---|---|---|
| Keep the money: borrow $500,000 at 4.50% ($2,767 a month) | $0 | $166,042 | $438,982 | $605,024 |
| Buy down: borrow $500,000 at 4.25% ($2,698 a month) | $5,000 | $161,898 | $437,145 | $604,043 |
| Borrow less: $495,000 at 4.50% ($2,740 a month) | $5,000 | $164,381 | $434,592 | $603,973 |
At this price, the buydown’s total is $70 higher than borrowing $5,000 less. A cheaper buydown or a larger rate cut can reverse the comparison, so run it with the lender’s actual quote.
With less than 20% down, the size of the down payment also changes the mortgage default insurance premium; see what CMHC insurance costs.
Does a lower rate help you qualify?
Lenders check that you could afford the payments at the greater of your contract rate plus 2% or 5.25%, a floor set by OSFI for uninsured mortgages and by the federal government's mortgage insurance rules (the Minister of Finance's Eligible Mortgage Loan Regulations) for insured ones. A lower contract rate therefore lowers the qualifying rate only while the contract rate plus 2% is above the 5.25% floor. At 4.25%, the qualifying rate is the greater of 6.25% and 5.25%, which is 6.25%. See the mortgage stress test for how the qualifying payment is used.
When a builder or seller pays
A builder or seller may offer to pay for a lower rate as a sales incentive. The same break-even arithmetic applies, with two extra questions: how long the lower rate lasts (only part of the term, or all of it), and whether a price reduction of the same amount would be worth more. A lower price reduces the amount you borrow for the whole amortization, as the comparison above shows.
Cash back: the reverse trade
A cash-back mortgage works the other way round, like the US “lender credits” that the CFPB says “work the same way as points, in reverse.” The FCAC describes cash back as an optional feature that “allows you to immediately receive a portion of your mortgage amount in cash”, and warns: “Usually, if you use the cash back feature, your interest rate is higher. The amount of interest you’ll pay may end up costing you more money than you get as cash back.” It adds that “your lender may ask you to repay some or all the cash back amount” if you break the contract before the end of the term. See cash-back mortgages.
Questions to ask a lender
- What rate do I get with no upfront payment, and what rate with it? (Get both in writing.)
- Is the lower rate for the whole term?
- Is the payment refundable, in whole or in part, if I break or transfer the mortgage?
- How does the payment show up in the cost of borrowing and the APR on the disclosure statement?
- Would you match a lower rate from another lender without a fee?
If you are still shopping, a rate hold protects a quoted rate while you compare.
Related pages
Sources
The figures and rules on this page come from these sources, last checked against them between September 25, 2026 and October 2, 2026. How we check facts.
- Bank of Canada: Conventional 5-year mortgage rate (data series)
- Bank of Canada: Conventional 5-year mortgage rate (data series)
- Bank of Canada: Conventional 5-year mortgage rate (data series)
- Bank of Canada: Data table
- CMHC: CMHC Purchase
- Financial Consumer Agency of Canada: How much you need for a down payment
- Justice Laws (Canada): Financial Consumer Protection Framework Regulations
- Justice Laws (Canada): Interest Act
- Justice Laws (Canada): Eligible Mortgage Loan Regulations
- OSFI: Minimum qualifying rate for uninsured mortgages
- OSFI: OSFI exempts uninsured mortgage straight switches from the prescribed MQR andβ¦
- OSFI: Amendments to the minimum qualifying rate for uninsured mortgages