What it means to lock in your mortgage rate

When it comes to locking it in, we’re not just talking about cuffing season. 

If you’re due to renew your mortgage, are looking to refinance, or are hoping to get pre-approved as you start your house hunting, you may have heard about the concept of locking in interest rates. 

What does it mean to lock in your rate?

If you're unfamiliar with what this means, don't worry! It's actually pretty simple. Essentially, a rate lock–or rate protection–allows you to secure a specific interest rate for a set period of time, typically 60 to 130 days, while you finalize your mortgage. 

This means that your interest rate won't go up between the time you apply for the loan and the time you actually close on your new house. So, if interest rates rise during that time (which they can do pretty quickly), you'll still pay the rate you locked in.

By locking in a rate, you can plan your budget more effectively and have peace of mind knowing what your payments will be for the next few months.

For example, imagine you're buying a house and your lender offers you an interest rate of 3.5%. You're happy with that rate, but you're worried that rates might go up in the next few months, which would increase your monthly payments. To avoid that, you decide to lock in the 3.5% rate for 120 days.

Now, even if rates go up to 4% during those 120 days, you'll still pay the 3.5% rate that you locked in. So, you'll have peace of mind knowing what your payments will be for the next few months and can plan your budget accordingly.

However, if rates go down to 3% during that period, you won't be able to take advantage of the lower rate unless you renegotiate with the lender. So, it's always a bit of a gamble when you lock in a rate.

Overall, locking in a mortgage rate for 120 days can be a smart move if you're worried about rising interest rates and want to have some stability in your monthly payments. 

Why do mortgage rates fluctuate?

There are a lot of factors that affect mortgage rates, including the federal government, the housing market, and the economy, which could include: 

• Canada’s key policy rate: This is the rate the Bank of Canada lends money to major banks, which ultimately affects the mortgage rates offered to consumers. The government sets this rate, also known as the target overnight rate, eight times a year.
• Housing demand: When demand for housing goes up, demand for mortgages follows, which leads to a rise in interest rates. When demand for homes is down, interest rates tend to drop to incentivize more homebuyers to enter the market. 
• Inflation rates: Higher inflation can lead to higher mortgage rates to compensate for increased risk.

When Should You Lock in Your Mortgage Rate? 

Deciding when to lock in your mortgage rate is a crucial financial decision, especially in a market where interest rates can fluctuate significantly. Here's a simplified guide to help you determine the best time to lock in your rate:

Timing Your Rate Lock

• Market Trends and Predictions: While it's challenging to predict the exact movement of interest rates, understanding market trends can provide guidance. Lenders and mortgage brokers often have insights into these trends.
• Comfort with Risk: If you prefer stability and predictability in your payments, locking in a rate when it's favorable to you might be the best approach.
• Financial Goals and Needs: Consider your long-term financial goals and current financial situation. If a fixed rate aligns better with your budgeting and financial planning, it might be time to lock in.
• Penalties and Fees: Be aware of the penalties and fees associated with switching from a variable to a fixed rate. On average, breaking a variable rate mortgage might include a penalty of about three months' interest, along with other potential fees.

Making the Decision

• Negotiation and Market Rates: Locking in your rate is a negotiation process. Your lender will consider your current variable rate and the standard rates in the market.
• Mortgage Advisor Consultation: If you need clarification on the competitiveness of the rate offered by your lender, consulting a mortgage advisor can provide clarity and potentially better options.

What are the benefits to locking in your interest rate while house hunting?

Locking in a mortgage rate while you're still house hunting can be a smart move for a few reasons. First of all, mortgage rates can be volatile and change frequently, sometimes even multiple times a day. So, by locking in a rate early on, you can protect yourself from any sudden spikes in rates that could increase your monthly payments.

Additionally, locking in a rate can help you budget more effectively. Knowing what your monthly payments will be can help you narrow down your house hunting options and make sure you're only looking at houses that fit within your budget. It can also give you peace of mind knowing that your payments won't suddenly become unaffordable if rates go up.

Another advantage of locking in a rate early is that it can give you an advantage when making an offer on a house. Sellers are often more likely to accept an offer from a buyer who has already secured financing, and having a locked-in rate can show them that you're serious and ready to move forward with the purchase.

To maximize the value of a rate lock, aim to secure the lowest possible rate for the longest period possible. This will cover you against any fluctuations in the market. But it is important to note that not all lenders offer 120-day periods in Canada–some only offer 90 days, while some can offer up to 130 days. 

Should I lock in my interest rate? 

Locking in your mortgage rate means you are guaranteed the rate offered to you for a 120-day period. If you need more time, don’t feel pressured to agree. Ask your lender if you could have another week to consider your options. Read up on any news about the Bank of Canada to learn whether there are indications that rates will go up above your locked-in rate. 

If they are predicted to rise, interest is growing in the housing market, and you can comfortably afford the rate you’ve been offered, it could be a great time to sign up. But if inflation is set to subside, the housing market is cooling off, and analysts are predicting a recession in the near future, you might want to hold off on a fixed rate until interest rates drop.
Also, consider your odds of getting approved elsewhere. If you qualify for a mortgage at most lenders, you have leverage to ask for a better rate than the one offered to you. Chances are you can get the same rate at another institution, so ask your lender if they’re willing to beat the rate to earn your business. Even knocking 0.1% off of your rate will save you a good amount of money off your loan. 

So if you’re ready to start your home financing journey but might need some help, apply with Pine today and we’ll help you lock in the lowest–and best rate–for you and your future.