Bank of Canada Paused the Policy Rate at 2.25%
Break-Even Rate
A break-even rate is the interest rate at which two mortgage options cost the same over a set period so that a borrower would be financially indifferent between them. It is most often used to compare a fixed-rate and a variable-rate mortgage by measuring how far variable rates could move before the cheaper option becomes more expensive.
Break-Even Rate Quick Facts
- Marks the rate at which two mortgage options cost the same
- Most often compares fixed-rate and variable-rate mortgages
- Measures interest rate risk rather than predicting rates
- Depends on assumptions about future rate movements
- Shifts as market conditions and rate expectations change
Best Mortgage Rates
What Is a Break-Even Rate
A break-even rate is a benchmark for comparing the cost of two mortgage options over the same time horizon, typically a fixed-rate mortgage and a variable-rate mortgage. It identifies the average future variable rate at which the total interest paid under both options would be equal.
Rather than forecasting where rates will go, the break-even rate quantifies how much variable rates would need to rise for the cost advantage to flip from one option to the other. That gives you a measurable threshold to weigh against your own view of rates rather than relying on sentiment.
Why the Break-Even Rate Matters for Mortgages
The break-even rate helps you weigh payment stability against interest rate risk. A fixed rate locks in predictable payments, while a variable rate exposes you to changing costs. The Financial Consumer Agency of Canada notes that “A variable interest rate can increase and decrease during your term,” and the break-even rate quantifies how much that movement would cost.
If the break-even rate sits well above today’s variable rate, the variable option can stay cheaper unless rates climb meaningfully. If it sits close to the current variable rate, a fixed mortgage may offer better protection. Lenders and brokers use the figure to frame risk, not to qualify you; qualification still runs through the stress test, and you can weigh it against a rate forecast.
How the Break-Even Rate Compares to Other Rate Measures
The break-even rate is read against the rate structures it compares.
Fixed mortgage rates. A fixed rate stays the same for the whole term. The break-even rate is the average variable rate that would make a variable mortgage cost as much as the known fixed cost over the same period.
Variable mortgage rates. Most Canadian variable rates are priced as prime minus a discount, so they move with the prime rate. The break-even rate indicates whether the likely path of prime keeps the variable option cheaper than the fixed option.
Adjustable-rate mortgages. With an adjustable-rate mortgage, the payment changes immediately when the prime rate moves, adding payment volatility on top of interest costs, so a break-even comparison should weigh both.
When you compare a five-year fixed rate at 4.50% with a variable rate starting at 3.75% on a $600,000 mortgage, amortized over 25 years. The fixed option locks in roughly $147,000 of interest over the term. The variable option costs less while rates stay low, but if the variable rate averages about 4.90% over the five years, the total interest matches that of the fixed option. That 4.90% average is the break-even rate: below it, the variable wins, above it, the fixed wins.
Common Mistakes and Misunderstandings About the Break-Even Rate
- Treating the break-even rate as a forecast of future rates
- Assuming a lower starting variable rate always means lower total cost
- Ignoring that the figure shifts when rate expectations change
- Overlooking how payment frequency and prepayments affect interest
- Believing lenders use the break-even rate to approve a mortgage
We’re curious…
Are you a first-time buyer?
Frequently Asked Questions (FAQ) About the Break-Even Rate
What does the break-even rate show?
It shows the average future variable rate at which a variable-rate mortgage would cost the same total interest as a fixed-rate mortgage over the same period.
What is the difference between the break-even rate and my contract rate?
Your contract rate is the rate you actually pay today. The break-even rate is a comparison threshold that tells you how far a variable rate could move before the cheaper option changes.
Is the break-even rate used for mortgage qualification in Canada?
No. Lenders qualify you with the stress test, using the higher of 5.25% or your contract rate plus 2%. The break-even rate is only a planning tool.
Does the break-even rate change over time?
Yes. It moves as fixed rates, variable rates, and market expectations change, so it reflects current conditions rather than a long-term forecast.
Can a broker calculate a break-even rate for me?
Yes. Many brokers and lenders run the comparison to support a conversation about interest rate risk, though it is not a regulatory requirement.