Rate Buydown

A rate buydown is an arrangement in which a borrower pays an upfront amount to a lender in exchange for a lower interest rate on a mortgage, either permanently for the whole term or temporarily for an initial period. The cost is an additional expense around closing that reduces the rate applied to the mortgage balance.

Permanent Versus Temporary Buydowns

A permanent buydown lowers the contract rate for the entire mortgage term. The discount is written into the mortgage documents, so the borrower pays the reduced rate throughout the term, whether the mortgage starts as fixed or variable.

A temporary buydown applies a deeper discount for a set opening period, then steps the rate back up on a schedule. Some builders and sellers offer this shape as a purchase incentive because it lowers the early payments while a buyer settles in. The rate in effect after the step-up period governs the balance of the term.

What It Costs and How It Is Paid

The buydown fee is typically quoted as a percentage of the mortgage amount, and lenders often tie the size of the discount to how much is paid. Depending on the lender, the fee may be paid in cash at closing or added to the mortgage balance. When it is added, the borrower pays interest on the fee itself for as long as it remains outstanding.

Why It Matters for Qualification

A lower rate reduces mortgage interest and improves the debt service ratios a lender calculates, which can help a borrower fit inside the GDS and TDS limits that OSFI Guideline B-20 sets for federally regulated lenders. That said, under the federal mortgage stress test borrowers generally qualify at a rate above the contract rate, and for a temporary buydown lenders commonly qualify the borrower using the higher rate that applies once the introductory period ends. An opening discount therefore may not increase the amount a borrower can qualify for.

The Break-Even Question

• Permanent buydown: higher upfront fee, with the benefit spread across the full term.
• Temporary buydown: lower upfront fee, with the benefit concentrated in the first years.
• Break-even: the point at which accumulated interest savings equal the fee paid. Selling, refinancing, or breaking the mortgage before then can erase the benefit, and some lenders claw back the discount on early payout.

Compare the fee against the interest saved over the period the mortgage is expected to be held, and confirm whether the discount survives an early payout. See how mortgage rates work in Canada for background on how contract rates are set.