Definition: A convertible mortgage is a type of mortgage that allows the borrower to start with a short-term, often variable interest rate, and convert it to a longer fixed-term mortgage without penalties. This type of mortgage provides flexibility for borrowers who may want to lock in a rate in the future if interest rates start to rise.
How convertible mortgages work
Convertible mortgages allow the borrower to:
- Begin with a shorter term or variable rate for initial flexibility.
- Lock in a fixed interest rate at any point during the term, generally without incurring prepayment penalties.
- Secure a longer fixed-term mortgage once they choose to convert, typically for a term of three to five years or more.
Why choose a convertible mortgage?
Convertible mortgages are ideal for borrowers who want flexibility while they watch interest rate trends. This type of mortgage offers the initial savings of a short-term or variable rate with the safety net of a fixed-rate option if rates increase.
Conversion options
When converting, borrowers typically have access to a lender’s posted or special rates for the term they are converting into. However, conversion rates are often higher than those offered for new fixed-rate mortgages.
Tip: Before opting for a convertible mortgage, check the terms with your lender as some lenders may impose minimum requirements on the fixed term when converting.
Last modified: November 5, 2024
