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A rate buydown is an arrangement where a lump-sum payment — from a builder, seller, or the borrower — is made to the lender in exchange for a lower interest rate on the mortgage, either for the full term or for an initial period. The result is a lower monthly payment than the mortgage’s standard rate would otherwise produce.
Whoever funds the buydown — often a builder on a new-construction sale, sometimes the borrower directly — pays the lender to accept a lower rate than the lender would otherwise offer. The lender’s posted rate and pricing for a given buydown are set by that lender and change regularly, so the cost of any specific buydown is confirmed with the lender rather than estimated from a general rule.
A temporary buydown typically reduces the payment for an initial period only, after which the payment reverts to what the mortgage’s actual contract rate produces — borrowers need to qualify and budget for that reversion, not just the reduced initial payment.
Qualification still uses the real numbers: a temporary buydown does not change how a lender applies the minimum qualifying rate — the file must still qualify under the standard stress-test rules.
Common on new construction: builders sometimes fund a buydown as a sales incentive, working through the lender’s broker channel and a finder’s fee-earning brokerage.
Pricing is lender-specific: the cost to buy down a rate by a given amount is set by each lender’s own pricing and is not a fixed, published figure across the industry.
Different from a rate hold: a buydown changes the actual rate charged; it is not the same as locking in a rate ahead of closing, which is a rate hold.
A builder offers a one-year rate buydown on a new-construction purchase, reducing the borrower’s payment for the first 12 months:
$2,850 − $2,540 = $310/month for the buydown period; the payment reverts to $2,850 once the buydown period ends.
Definitions reflect Canadian federal and provincial rules as of the “Updated” date above. Not advice for any specific file.
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