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Should I get a Mortgage rate lock? Best tips for 2024

Should I get mortgage rate lock in Canada? Understand when rate locks are beneficial, available lock periods, float downs, savings tactics, and alternatives.

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 comprehensive guide will examine mortgage rate lock in Canada 2024, including how they work, their benefits and risks, steps to take to secure a rate lock, and strategies to get the best possible rate while still locking in so you can make the most informed decision.

Whether you seek protection from rate hikes or want flexibility around interest rate fluctuations, this detailed guide will equip you with everything you need to optimize your mortgage savings and stability.

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. 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.

Key Features of a Mortgage Rate Lock:

  • Guarantees an interest rate from pre-approval to closing
  • Typically lasts 30-120 days
  • Protects from rate hikes during the lock period
  • May include a float down option to secure a lower rate
  • Offered on fixed and variable rate mortgages

How Mortgage Rate Lock Works?

How Mortgage Rate Lock Works?
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 honored 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.

Benefits of Mortgage Rate Lock

There are several 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

  • 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.
  • For example, if rates went up 0.5% without a lock, it could cost over $100 per month, up to over $6,000 in Interest over five years.

Peace of Mind

  • Knowing your rate is secured for the next 30-120+ days provides peace of mind through the stressful home-buying process.
  • You can focus your energy on your purchase and move rather than monitoring rate changes.
  • Reduce 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 makes your offer stronger than other buyers who have not secured pre-approval yet
  • Provides confidence in your ability to close the purchase as planned.

Risks and Tradeoffs of Mortgage Rate Lock

Risks and Tradeoffs of Mortgage Rate Lock
Risks and Tradeoffs of Mortgage Rate Lock

While rate locks provide stability and protection, some 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 honor the full rate lock terms no matter what happens with 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.

(Source: https://www.rocketmortgage.com/learn/float-down-option)

When to Lock In Mortgage Rate in Canada?

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.

Steps to Take When Locking In Mortgage Rate

Follow these steps when securing a mortgage rate lock:

  1. Get pre-approved – Make sure the rate and terms fit your budget.
  2. Inquire about rate lock options, periods and associated fees. Discuss options for 30, 60, 90 or 120+ day lock periods and whether any fees apply. Understand all costs.
  3. Request the longest lock term offered by your lender. The longer the rate is locked, the more protection you have against rate increases.
  4. Ask for a float down provision in case rates decline. This allows you to secure a lower rate if the market drops during your lock period. Make sure the float-down fees are clearly explained.
  5. Lock in the rate once an offer is accepted on a property. Finalize the rate lock agreement when your offer has been accepted, and avoid locking too early.
  6. Notify the lender immediately if any application details change. Appraisal values, income, or credit scores differing from initial estimates could change your rate. Keep the lender updated.
  7. Consider extending the lock period if needed. If closing is delayed, you may need to extend your lock by days or weeks to maintain rate protection. Most lenders allow extensions for a fee.
  8. Review the documentation carefully before signing. Also, read the rate lock agreement thoroughly to ensure you understand the terms and conditions.

What Happens if Rates Drop During Lock Period?

What Happens if Rates Drop
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 is the decline temporary, and rates will 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.

How Long Can You Lock In 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 lock period last minute
  • Longer lock terms may have slightly higher rates or fees – do the math to see if worthwhile
  • Monitor rates and extend 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:

LenderMax Lock Period
BMO130 days
Scotiabank130 days
Nesto120 days
First National120 days
TD120 days
RBC120 days
Rate lock periods by major lenders

(Source: https://moneygenius.ca/blog/should-i-lock-in-my-mortgage-rate-canada)

Should I Lock in 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 prime rising, locks 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.

Strategies to Get the Lowest Mortgage Rate

Beyond basic mortgage rate lock, borrowers can deploy strategies to secure rock-bottom rates:

  • Shop multiple lenders – Compare rates. Don’t settle on just one option.
  • Leverage broker expertise to pit lenders against each other
  • Take Mortgage stress test to qualify for lowest advertised rates
  • Negotiate with lenders for rate buy downs or closing cost credits
  • Consider longer 7 to 10-year terms for better rates
  • Time the market by monitoring rate trends and applying strategically
  • Enhance credit score and lower debt obligations before applying

A knowledgeable broker understands these tactics and can guide you in using them effectively to maximize mortgage savings.

Conclusion

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

Consulting mortgage professionals for advice on forecasts, lock periods, float downs and rate savings strategies is highly recommended during this high interest rate climate.

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.

FAQs

When should I get a mortgage rate lock in Canada?

Lock in your rate when rates are rising or projected to increase soon. Also, lock after an offer is accepted to protect it through closing.

What are the benefits of a mortgage rate lock in Canada?

Payment stability, protection from rate hikes, budgeting predictability, and showing sellers your financing is secure.

What are the risks of a mortgage rate lock in Canada?

Potential to miss out on rate decreases and higher costs for a float-down option. Reputable lenders honor locks.

How long can I lock my mortgage rate in Canada?

Most lenders offer 30-120 day rate locks. BMO and Scotiabank provide locks for up to 130 days.

Can I get a lower rate if rates decrease during my mortgage lock?

Yes, if you negotiated a float-down option with your lender when locking in your rate.

Should I lock in a variable or fixed mortgage rate in Canada?

Locking fixed rates provides more stability. Consider locking variable rates when the prime rate is rising.

Where can I get the longest mortgage rate lock in Canada?

BMO, Scotiabank, Nesto, and RBC offer extended rate lock terms over 120 days.

Is locking my mortgage rate in Canada worth it?

Locking provides significant savings and stability when rising or volatile rates. Do the math on potential rate differences.

Can I negotiate the terms of my mortgage rate lock in Canada?

Yes, discuss options for the ideal lock period, float-down inclusion, and lowest possible base rate with your lender.

What happens if I cancel my mortgage rate lock?

If you cancel a rate lock, you lose the secured rate and will pay current market rates at closing. Re-locking may incur fees.

Article Sources

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

  1. Mortgage Rate Lock: When Do I Lock In My Interest Rate? – nerdwallet.com
  2. Mortgage Rate Lock: Definition, How It Works, Periods, and Fees – investopedia.com
  3. Should I Lock My Mortgage Rate In Canada? – moneygenius.ca
  4. Mortgage Rate Lock-in – wowa.ca

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