Should I get a Mortgage rate lock in Canada?

Getting a mortgage is a major financial undertaking that involves many important decisions. One of the most critical choices you will encounter is whether or not to get a mortgage rate lock.

Locking in your rate can provide stability and peace of mind amidst market volatility, while opting not to lock gives you the flexibility to take advantage of rate decreases.

This guide will examine mortgage rate locks in Canada, including how they work, their benefits and risks, and steps to secure a rate lock so you can make the most informed decision.

What is a Mortgage Rate Lock?

A mortgage rate lock is an agreement between a homebuyer and a mortgage lender that allows the borrower to secure a specific interest rate for a set period when getting a mortgage. This interval is usually between 30 to 120 days and covers the period from mortgage pre-approval through to closing.

By locking in a rate, the borrower is shielded from any interest rate increases during the lock-in timeframe. The locked-in rate will remain unchanged regardless of broader market fluctuations. This provides protection should rates rise while securing home financing.

How Mortgage Rate Lock Works?

Mortgage lenders usually offer the option to lock in a rate after the borrower has been pre-approved for a mortgage and received a pre-approval letter. This letter details the amount approved, the specific interest rate, and other terms.

At this stage, the lender offers the option to lock in the offered rate for the given timeframe, which could be 30, 60, 90, or 120 days. The borrower can elect to lock in the rate, securing those terms regardless of market fluctuations.

As long as the mortgage application details remain unchanged, the locked-in rate will be honoured until closing. However, interest rate adjustments could occur if appraisal values or credit scores differ from initial estimates.

A mortgage rate lock essentially works like an insurance policy, protecting the borrower if rates increase but forfeiting gains if rates decrease. Some lenders offer float-down provisions.

With a float down, if rates decrease below your locked rate, you can float down and lock in the new lower prevailing rate. This allows you to take advantage of dips in interest rates even after securing a rate lock.

How Long Can You Lock In a Mortgage Rate?

Things to consider regarding lock periods:

• Aim for the maximum term offered by your lender to allow ample time to close
• Factor in possible delays – you may need to extend the lock period at the last minute
• Longer lock terms may have slightly higher rates or fees – do the math to see if it is worthwhile
• Monitor rates and extend the lock proactively if the initial period is insufficient
• Keep communicating with the lender if the closure date changes

Standard rate lock periods offered by major lenders:

Lender	Max Lock Period
BMO	130 days
Scotiabank	130 days
Nesto	120 days
First National	120 days
TD	120 days
RBC	120 days

What are the Benefits of a Mortgage Rate Lock?

There are 4 key benefits that make locking in a mortgage rate worthwhile for many borrowers:

Payment Stability & Predictability

Mortgage rate lock allows you to accurately predict your monthly mortgage payment over the entire term of your financing. This payment certainty aids immensely in budgeting. You don’t have to worry about potential rate hikes, raising your payments and throwing your budget off.

For example, a $400,000 mortgage at 5% over 25 years would have a monthly payment of $2,108. Locking in provides certainty that a sudden rate hike wouldn’t raise it to $2,300 or beyond.

Protection from Rising Interest Rates

A mortgage rate lock shields you from any interest rate increases between pre-approval and closing on your mortgage. This protection can save you thousands over the lifespan of your mortgage term if rates rise significantly.

Peace of Mind

Knowing your rate is secured provides peace of mind during the stressful home-buying process. You can focus on your purchase and move rather than monitoring rate changes, reducing anxiety about affording sudden payment spikes from rate hikes.

Shows Sellers Your Financing is Secure

Locking in demonstrates to sellers that you have obtained home financing already. It strengthens your offer more than other buyers who have not yet secured pre-approval and provides confidence in your ability to close the purchase as planned.

What are the Risks of Mortgage Rate Lock?

While rate locks provide stability and protection, 3 potential downsides include:

Missing Out on Rate Decreases

This is the most significant risk – new lower rates won’t apply once your rate is locked. If market rates decrease during your lock period, you lose out on savings. You remain stuck at the higher locked-in rate unless you negotiate a float-down option.

Possibility of Lock Period Expiring

Some lenders may let rate lock periods expire if rates rise substantially. This would force you to accept a much higher current rate at closing. However, reputable lenders will honour the full rate lock terms regardless of market rates. Thus, shop around to find the best lender for your mortgage.

Higher Rates or Fees for Float Down Privilege

A float-down can help secure a lower rate if rates decline, but carry added costs. Lenders may charge fees up to 1% of the mortgage amount for a float-down. In the other case, they may inflate the base rate slightly in exchange for the float-down option.

When should the Mortgage rate be locked in?

Timing is critical when deciding to lock in a mortgage rate. Consider the following factors:

• Interest rate trends and forecasts – are further increases predicted?
• Your personal risk tolerance
• Aligning with your budget and financial goals
• Lock period required to reach closing comfortably
• Any fees or penalties for breaking a variable rate

Connect with a mortgage advisor to discuss market rate projections specific to your situation. Those expecting rate hikes may want to lock in as soon as possible.

What Happens if Rates Drop During Lock Period?

If interest rates decrease during your lock-in window, you have two options:

1. Exercise a float-down option to secure the lower rate – this may incur added fees. Review the float-down terms to understand the associated costs and how much you must drop below the market rate to trigger this option. Calculate if savings exceed fees. Also consider:

• How many times can the float down be used if rates keep decreasing? Often only allowed once.
• Is there a cap on how low the float-down rate can go? Lenders may limit the maximum decrease.
• Can you request a lower rate without floating down? It never hurts to ask the lender if they’ll lower the rate.

2. Stick with the higher locked-in rate or withdraw from the mortgage rate lock agreement. Assess whether savings from lower rates justify restarting the financing process. Weigh benefits and delays. Consider:

• How much time is left until closing? The shorter the timeframe, the riskier withdrawing.
• Are lower rates likely to last? Or will the decline be temporary, and will rates rebound?
• Are delays and restarting financing worth potential savings from a lower rate?

If you did not negotiate a float-down but still want a lower rate, you’d need to cancel the existing mortgage application and reapply at the new lower rate. This is likely not feasible during the home-buying process. That’s why a float-down provision is so valuable.

Should I lock in a rate with Variable Rate Mortgages?

For variable-rate mortgages, rate locks mainly reserve the lender’s discounted rate from prime rather than the overall variable rate. Things to consider when deciding to lock in a variable mortgage rate:

• Monitor prime rate forecasts – If the prime rises, locks become more beneficial
• Understand the lender’s discount – Locking holds the discount, but prime still fluctuates
• Consider payment stability benefits vs. potential savings if the prime rate falls
• Know the rules – Some lenders limit the number of locks or have fees to re-lock
• Watch for promotions – Lenders may offer discounted rates to lock in
• Time it strategically – Apply when lenders compete aggressively on discounts
• Compare Fixed vs. variable rates – Is converting to fixed warranted?

Intelligent variable rate lock decisions take an analysis of factors like the lender discount, prime rate predictions, risk tolerance, and more. Consult an expert mortgage advisor for guidance.

Mortgage Rate Lock FAQs

Summary

Rate locks can be very beneficial but also involve tradeoffs. There is no universally right choice regarding whether or not to lock in your mortgage rate. It depends entirely on your financial situation, risk appetite, and individual goals.

If you want to ensure you make the optimal rate lock decision tailored to your unique situation, experienced mortgage advisors at Best Mortgage Online can provide trusted guidance to help you secure the ideal mortgage solution, maximizing your savings and peace of mind.

Article Sources

At Best Mortgage Online, the statistics we cite come from trusted governmental and industry organizations to guarantee accuracy.

1. Mortgage Rate Lock: Definition, How It Works, Periods, and Fees – investopedia.com