Lock or float? How to run the renewal break-even

TopRates.ca is educational. Quotes are not offered or arranged on this site today. Nothing here is advice for your situation — it is the plain-English background to bring to a licensed mortgage professional.

The fixed-versus-variable decision at renewal comes down to one number you can calculate: the average variable rate over the new term at which you would have paid the same interest either way. Below that average, floating wins; above it, locking in did. The calculation tells you how much cushion today's spread gives you and how fast rising rates would eat it. It cannot tell you where rates will go, and it says nothing about whether you could sleep through the ride.

The federal consumer agency's definitions are the clean ones. A fixed interest rate stays the same for the entire term, is usually higher than a variable rate for a similar term, and keeps your payments the same for the term. A variable interest rate may increase and decrease during the term and is typically lower than a fixed rate for a similar term.

Variable comes in two shapes, and the shape matters as much as the rate. With a fixed payment on a variable rate, your payment stays the same for the term while the share going to interest moves with the rate; if rates rise, less of each payment reduces the principal, and if they rise enough the payment can stop covering the interest at all. With an adjustable payment, the payment itself changes when the rate changes, so the amortization stays on track and your cash flow takes the movement instead. A hybrid or combination mortgage splits the balance between the two.

It measures the average variable rate over the term that makes the total interest equal to what the fixed rate would have cost. The method here is TopRates.ca's own framing — there is no official definition — but the arithmetic is standard.

Start with the spread: the fixed rate offered at renewal minus the variable rate offered at renewal. That spread is the cushion. If the variable rate never moves, you keep the whole cushion every year of the term. If it rises, each increase uses up some of it; the break-even is the point where the increases, weighted by how long each one lasted, have used it all.

A labelled illustration, with round numbers that are not current offers: suppose a lender offers a five-year fixed rate of 4.5 per cent and a variable rate of 4.0 per cent. The cushion is 0.5 percentage points. If the variable rate stayed at 4.0 per cent for two years and then rose to 4.75 per cent for the remaining three, the average over the term would be (2 × 4.0 + 3 × 4.75) ÷ 5 = 4.45 per cent — just under the fixed rate, so floating would still have cost slightly less in interest.

If the rise came after one year instead of two, the average would be (1 × 4.0 + 4 × 4.75) ÷ 5 = 4.6 per cent, and locking in would have won. Timing matters as much as size.

• Write down the two offers on the table: the fixed rate and term, and the variable rate expressed as prime plus or minus a margin. The variable rate moves when prime moves, and prime moves with the Bank of Canada's policy rate; the Bank publishes its decision dates for the year in advance, with the remaining 2026 announcements on October 28 and December 9. The Bank's current policy rate, with its as-of date, is on the Bank of Canada's own site; the number is deliberately not printed here, because it changes on those dates.
• Subtract to get the cushion. On a five-year term, a cushion of half a percentage point means the variable rate can average half a point higher than its starting level over the term before you are worse off.
• Sketch two or three rate paths — flat, a rise after year one, a rise after year two — and compute the term average for each, weighting by years. Compare each average with the fixed rate. That is the whole test.
• Convert the averages into dollars with a payment calculator. Interest is charged on a declining balance, so the dollar difference is smaller than the rate difference suggests, and smaller still later in the amortization. Any lender's or the federal consumer agency's payment calculator will run the payment at each rate you enter.
• Decide which variable shape you would hold. On a fixed-payment variable, a rising path also means a slower paydown; on an adjustable-payment variable, it means a higher monthly payment. Put the higher payment in your budget before you choose.

Two qualifying facts sit underneath the numbers. Lenders must qualify you at the higher of 5.25 per cent and your contract rate plus 2 per cent, for insured and uninsured mortgages alike. And the banking regulator does not expect lenders to apply that minimum qualifying rate to an uninsured straight switch at renewal — moving from one federally regulated lender to another without increasing the amortization or the loan amount — which widens the field of offers you can take the break-even to.

It cannot tell you the path. Every rate path in the exercise is a guess, and the Bank of Canada's own decision at each announcement depends on data that does not exist yet. The break-even converts a forecast into a dollar consequence; it does not supply the forecast.

It cannot price the exit. Lenders charge a penalty when you break a closed mortgage before the end of its term, and the method commonly differs by rate type: variable-rate mortgages commonly carry a penalty of three months' interest, while fixed-rate mortgages commonly use the greater of three months' interest and an interest rate differential, which can be far larger when rates have fallen since you signed. If there is any chance you will sell, refinance or move before the term ends, the penalty terms belong in the comparison alongside the rate. Check your contract for the exact method.

It cannot measure you. A household that would lie awake after a rate increase has already paid for the variable in a currency the calculation does not count. The spread is the price of certainty, and whether that price is worth paying is a judgement, not a sum.

And it cannot see the renewal statement for you. The offer in a renewal letter is a starting point; the rates on the table change when you ask, and a straight switch at renewal is a real option. Run the break-even on the offers you can actually get, not the first one you are sent.

• What fixed and variable rates will you offer me, and for which terms?
• Is the variable rate a fixed payment or an adjustable payment, and what would my payment be if prime rose by one point?
• What is the prepayment penalty method on each option, in writing?
• Does this renewal qualify as a straight switch if I move it to another lender?
• What does the term average of the variable rate need to be for me to come out ahead — and do I believe it?

For what the insurance on a high-ratio mortgage does and does not do for you, see mortgage insurance in the glossary.

TopRates.ca is educational. Quotes are not offered or arranged on this site today.