How to Switch from a Variable Mortgage to a Fixed Mortgage
Switching to a Fixed Rate Mortgage: A Step-by-Step Guide
Are you currently on a variable rate mortgage and considering switching to a fixed rate? If so, you're not alone.
Many homeowners choose to switch to a fixed rate mortgage to provide stability and predictability in their monthly mortgage payments. However, it's important to understand the differences between a variable rate and a fixed rate mortgage before you switch.
With a variable rate mortgage, your interest rate can fluctuate over time, which can lead to unpredictable monthly payments. On the other hand, with a fixed rate mortgage, your interest rate remains the same for the duration of the term, providing you with a consistent payment amount.
Understanding the benefits and drawbacks of each type of mortgage can help you make an informed decision.
What Is a Variable Rate Mortgage?
A variable rate mortgage is a type of mortgage where the interest rate can change over time. Bank Prime trades at a premium to the Over Night Lending Rate issued by the Bank of Canada.
When the prime rate changes, the interest rate on your mortgage will change, which will then either change your monthly payment or the amount that goes towards interes, depending on the type of variable term you have. (Remember that variable rate mortgages can be either true variable rates or adjustable rate mortgages.)
Variable rate mortgages can be attractive because they often start with a lower interest rate than fixed rate mortgages. And while there is potential your mortgage payment will increase, there is also the potential your payments will decrease if the prime rate decreases.
What Is a Fixed Rate Mortgage?
A fixed rate mortgage is a type of mortgage in which the interest rate remains the same for the entire term of the loan (for many mortgages, the term is 5 years although in recent years we’ve seen movement towards shorter terms.) This means that your monthly mortgage payment will remain the same, regardless of changes in the economy, like recessions or inflation.
Fixed rate mortgages can be attractive because they offer stability and predictability. You know exactly how much your monthly mortgage payment will be for the entire term of the loan.
However, they can also be more expensive than variable rate mortgages because the interest rate is typically higher and there is no chance your rate will decrease.
All of the above being said, at the time of writing, June 2023, fixed rate mortgages are actually less expensive than variable rate mortgages. This is a unique time in our economy and as such, your fixed or variable rate decisions should definitely be discussed with a mortgage broker so that you’re making decisions with the most current market information on hand.
What Is Better: a Variable Rate or a Fixed Rate?
Historically speaking, over the last 40 years, variable rates have saved Canadians money on interest throughout the entire amortization of your mortgage (usually 25-30 years). That means if you were to stick with a variable rate for the full 25-30 years, you would probably pay less interest than someone with a fixed rate mortgage.
However, there could be 5-year terms within those 25-30 years where you end up paying more interest with a variable mortgage than a fixed rate, because the variable rate is increasing.
This would be more likely in times of inflation, where the Bank of Canada increases the prime rate, or times of economic change, like the post-COVID economy.
Factors to Consider Before Switching to a Fixed Rate Mortgage
If you are considering switching from a variable to a fixed rate mortgage, there are several factors you should consider before making the switch. You want to consider:
The current interest rate - where are fixed rates relative to variable rates?
The current economy - are rates still likely to be on the rise?
Loan term - how many years do I have remaining on my loan?
Future plans - remember that fixed rate mortgages can come with larger payout penalties than variable rate mortgages.
Current Interest Rates
When considering a fixed rate mortgage, it's important to compare the current interest rates with the rate you are currently paying on your variable rate mortgage.
If the current fixed rate is higher than your variable rate, it may not be worth it to switch. However, if the current fixed rate is lower, you may be able to save money in the long run by switching.
Remember that switching to a fixed rate at your current lender isn’t necessarily the best option. Here are some tips:
Step One: Confirm your current variable rate and remaining mortgage term at your lender
Step Two: Ask your current lender for quotes on available rates should you decide to lock in
Step Three: Shop around! Check-in with a mortgage broker and find out what other lenders are offering for fixed term mortgages
Step Four: Analyze your options. Understand your payout penalty and your current lender and decide if it’s worth the cost to move your file to a new lender at a lower rate!
Current Economy
The current interest rates and the current economy will be intertwined. If the economy is in a recession or if there is a lot of economic uncertainty, interest rates will usually be lower.
The economy in 2020 is a perfect example. Due to the uncertainty caused by COVID-19, interest rates were lowered to encourage spending and reduce the economic downturn. In this case, it probably made sense to lock in a fixed rate mortgage.
Loan Term
Another factor to consider is the term of your loan and how much time you have remaining. For example, if you only have 6 months left on a 5-year mortgage term, it may not be worth it to switch to a fixed rate mortgage, as you may end up paying more fees and penalties than you would receive in interest savings.
However, if you have a few years left before your mortgage renewal, switching to a fixed rate mortgage may provide you with more stability and peace of mind.
Future Plans
You should always consider your future plans when deciding whether to switch to a fixed rate mortgage or not. If your financial situation is going to change or if you have a tight budget, a fixed rate mortgage might make more sense.
For example, if you plan on having kids soon or there isn’t much room in your monthly budget for increasing expenses, a fixed rate mortgage can remove a lot of financial worry month to month.
On the other hand, fixed rate terms typically come with higher payout penalties. If you’re thinking that you will sell the property or move, it’s important to think about taking a shorter mortgage term.
What to Know Before You Switch
Every lender has a different policy when you lock in a variable rate mortgage. Because it can vary, it’s important to confirm the details with your mortgage broker or lender directly.
When you are switching from a variable rate to a fixed rate at your current lender, you are required to take a mortgage term that is equal to or longer than your remaining mortgage term. For example, if you have 4 years remaining on your current variable rate mortgage, you will have to choose a fixed rate mortgage of 4 years or longer.
If you decide that you want to move to a new lender, you can choose an entirely new fixed mortgage term. Mortgage terms range from 1 to 10 years in Canada.
How to Switch from a Variable to a Fixed Rate Mortgage
Contacting Your Lender
The first step is to contact your mortgage broker or bank and let them know you want to switch from a variable to a fixed rate mortgage and you’d like some quotes. They'll be able to tell you if you can switch from a variable rate and what the process involves. You can do this by phone or email, or you can visit your broker in person.
Running the Numbers
Now that you’ve got the quotes from your current lender, it’s time to decide if it makes sense to lock in at the current mortgage lender or move to a new lender for a lower fixed rate. To make this decision you need the following information:
Quotes from your current lender
An estimated payout penalty from your current lender
Quotes from the new lender
Estimated costs to move the mortgage to the new lender, for example:
Appraisal fees
Title transfer fees
Discharge fees
Legal feess
Your mortgage broker should be able to help you analyze your options and decide what leaves the most money in your pocket at the end of the transaction.
Gathering Required Documents
Switching from a variable rate to a fixed rate at your current lender will not require another qualification. That being said, before you can switch to a fixed rate mortgage at a new lender, you'll need to provide your broker with some documents and confirm your deal qualifies with the new lender.
These might include proof of income, your current mortgage statement, property tax statement and your current home insurance policy. Make sure you have everything you need before you start the process.
Negotiating the Terms
Once you've decided that you’re moving your mortgage to a new lender and provided all the necessary documents, it's time to negotiate the terms of your new mortgage.
This might involve discussing the length of the loan, the interest rate, and any fees or charges that might be involved. Many lenders will switch your mortgage to a fixed rate without a fee, but this isn’t always the case.
Signing the Agreement
Once you've agreed on the terms of your new mortgage, it's time to sign the agreement. Make sure you read through everything carefully and understand all the terms before you sign.
If there's anything you're unsure about, don't be afraid to ask your mortgage broker for clarification.
Should You Switch from a Variable Rate to a Fixed Rate Mortgage?
Switching from a variable to a fixed rate mortgage can be a smart financial decision for many homeowners. By locking in a fixed interest rate, you can protect yourself from the risk of rising interest rates and enjoy consistent monthly payments.
That said, there is also the chance you could lock in a fixed rate, only to have the variable rate decrease. Before making the switch, it's important to carefully consider your financial situation and goals.
Take the time to compare different mortgage options and calculate the potential costs and savings of switching to a fixed rate mortgage. Remember that while a fixed rate mortgage can offer stability and peace of mind, it may not be the best choice for everyone.
If you’re not sure which type of mortgage is right for you, speak to the mortgage experts at Spire Mortgage. We can help you navigate your unique financial situation and get the right mortgage for you.
