Hedging Interest Rates as a Real Estate Investor
- Medvisory Team
- 7 days ago
- 4 min read
For much of the last decade, the playbook was simple: lock a five-year fixed, build equity, repeat. In 2025, the calculus is more nuanced. Inflation has cooled and the Bank of Canada has started cutting, but lending rates remain elevated by historical standards—and they don’t move in straight lines. In this kind of market, disciplined investors don’t try to “guess the bottom.” They hedge rate risk so cash flow survives both slower-than-expected cuts and surprise bumps.
This guide lays out practical, investor-friendly hedges you can implement now, and how to choose between them based on your portfolio, timelines, and tolerance for volatility.
The rate reality you’re hedging against
Fixed follows bonds—slowly. When bond yields drift lower, lenders can ease fixed mortgage rates, but pass-through isn’t immediate. That makes rate holds valuable while you shop or refinance.
Three-year terms are back. If you believe cuts continue over the next 18–24 months, a 3-year fixed can position you to renew sooner into lower rates. If your priority is payment certainty and fewer touchpoints, the 5-year remains the anchor.
Market pulse matters. In the GTA, sales have strengthened off last year’s lows, prices are stabilizing, and choice remains decent. Affordability is improving at the margin—but is still rate-sensitive.
The backdrop doesn’t scream “all variable” or “all long fixed.” It argues for structure—spreading your duration and preserving optionality.
Your hedging toolkit (what actually works)
Ladder your terms
Instead of placing all your debt on a single renewal date, split financing across maturities—e.g., half 3-year fixed, half 5-year fixed. If cuts arrive sooner, the 3-year tranche captures them at renewal; if easing is slow, the 5-year anchors payments.
Why it works: You’re diversifying duration risk—shrinking the tails rather than trying to maximize one perfect outcome.
Laddering is a simple, paperwork-light hedge most lenders will accommodate across properties or loan splits.
Pair a fixed first mortgage with a readvanceable HELOC
Lock your first charge on a competitive fixed term for payment certainty, and keep a readvanceable HELOC for liquidity (turnover, cap-ex, bridging). This separates payment risk from cash-flow shocks so you’re not forced to refinance in a bad window.
A HELOC isn’t for lifestyle spending—it’s your shock absorber that lets you hold through noise.
Treat a rate hold like a free option
Most banks and brokerages will hold a rate for 90–120 days on pre-approval. If rates fall before closing, you renegotiate; if they rise, you keep the hold. In a flat-to-easing fixed-rate tape, this is the cheapest hedge you can buy.
Shop multiple channels. The gap between headline and negotiated rates is still meaningful.
Match term length to your thesis (and temperament)
Choose 3-year if you expect cuts inside your hold period or want flexibility (planned refinance, sale, or equity event).
Choose 5-year if your priority is budget certainty and fewer renewals.
Still undecided? Ladder the exposure and let time work in your favour.
Rule of thumb (hedged): If your pro-forma works at today’s fixed rate plus 100–150 bps, a 3-year can be a smart bridge to a lower-rate renewal. If a payment bump would squeeze DSCR, anchor more weight in a 5-year.
Read the fine print: penalties, portability, blend-and-extend
A great entry rate can be undone by a nasty exit. Ask—in writing—how prepayment penalties are calculated (IRD vs. three months’ interest), whether you can blend-and-extend without breaking, and how portability works if you sell. The contract is part of your hedge.
Hedge at the cash-flow level (not just the rate)
Amortization as a valve. A longer amortization lowers required payments during tight periods; when cash improves, use prepayment privileges to accelerate principal.
Stress-test DSCR at +200 bps and 5–10% expense overruns.
Liquidity ladder. Keep 3–6 months of P&I + taxes per door in HISA/GICs.
Lease timing & cap-ex calendar. Align major turns to renewal windows where possible.
The strongest hedge is a portfolio that survives multiple paths—not one that only wins if your rate call is perfect.
Where rates are printing right now (illustrative)
3-year fixed: low-to-mid-3s at competitive brokers;
5-year fixed: high-3s on best-rate marketplaces, higher on some bank shelves;
Variables: promotional discounts exist, but the benefit depends on how quickly cuts flow through to prime.
Reading it: Three-year insured deals can carry slightly lower entry payments than five-year bank-shelf rates, while five-year brokered rates remain competitive. Variables can win if cuts arrive quickly—but your cash flow must tolerate the wait.
A worked example (Ontario investor, insured)
Scenario: $500,000 mortgage, 25-year amortization.
3-year fixed ~3.64%: payment ≈ $2,533/mo
5-year fixed ~3.84%: payment ≈ $2,600/mo
If your underwriting needs sub-$2,600 to breathe, a 3-year or a ladder (3 + 5) is compelling. If you can comfortably service ~$2,600 today and want fewer touchpoints, anchoring more weight in a 5-year is the cleaner hedge.
Three hedged playbooks you can implement this quarter
Cash-Flow First
70–80%: 5-year fixed on core doors
20–30%: readvanceable HELOC for cap-ex & turns
DSCR stress at +150 bps
Why it works: Locks most payments; preserves liquidity to avoid forced refinances.
Flex-to-Cut
50%: 3-year fixed
50%: 5-year fixed
90–120 day rate holds on each tranche during acquisition/refi
Why it works: Captures potential mid-cycle rate relief without leaving all cash flow exposed today.
Barbell with Variable (for experienced operators)
Core: 5-year fixed on tighter DSCR assets
Opportunistic: variable on a property with strong rent growth or a short hold horizon
Maintain 6–9 months liquidity across the portfolio
Why it works: You’re explicitly taking upside optionality where your cash flow can handle it.
Don’t forget the non-rate friction
Closing costs (Toronto): Ontario land transfer tax plus municipal LTT—budget both. First-time buyer rebates exist at both levels.
Vacant Home Tax: Annual declaration required; penalties apply for non-compliance.
Renewal timing: Market conditions at renewal matter as much as today’s “win.” Stagger maturities to avoid a single-date cliff.
Hedging interest-rate risk in 2025 isn’t about heroically calling the next BoC move. It’s about portfolio design:
Diversify duration (ladder 3- and 5-year).
Separate payment certainty (fixed) from liquidity (HELOC).
Treat rate holds as free options.
Underwrite to stress-tested DSCR, not the rosiest rate path.
With this playbook, you don’t need a perfect forecast—you need a structure that performs across forecasts. If you’re weighing a purchase, refi, or portfolio restructure, we can model your cash flow under multiple rate paths and build a hedged mix that supports your goals, timeline, and tolerance.