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For first-time homebuyers in Canada, it can be difficult to find mortgage rates and terms that suit you and your budget. But what do you do when interest rates constantly fluctuate, and a mortgage agreement that works for you one day might not work the next day? Locking your mortgage allows you to lock in a specific interest rate as you finalize your mortgage agreement.
To understand the process of locking a mortgage in Canada, this article outlines the pros, cons, and factors to consider.
If you’re a homebuyer considering locking their mortgage and who wants a quick overview of what this entails, read on.
An Overview Of Mortgage Rates
Mortgages are loans secured to buy a property. These loans are paid back with interest over a specific term. In Canada, mainly banks and credit unions supply these loans.
The amount borrowed, the term, the interest rate, and the payment schedule are among the critical components of a mortgage. When referring to “mortgage rates” this article mainly refers to interest rates, which directly influences the cost of borrowing.
In Canada, mortgage rates vary based on the following:
- The Bank of Canada’s policy interest rate.
- The Bond market.
- The lender’s cost of funds.
- The level of competition among lenders.
- Housing demands.
- Inflation rates.
With this variation of interest over time, it may be advantageous to lock in a rate. However, if rates are expected to fall, it might be beneficial to hold off.
Predicting the future movement of rates is highly uncertain, leading to the question – “How do I know if I should lock my mortgage rate or not?”. To answer this question, it’s helpful to understand what it means to lock a mortgage rate:
What Does It Mean To Lock A Mortgage Rate?
Homebuyers who are pre-approved for a mortgage and still need to finalize their agreement can lock their mortgage rate. This means the lender guarantees a specific interest rate for a certain period, typically between 30 and 120 days.
Locking a mortgage may be a good decision based on the circumstances, but it’s not always straightforward. The following sections outline the pros and cons of mortgage locks to help you make a fully informed decision.
The Pros Of Locking Your Mortgage Rate In Canada:
- Provides Certainty: Locking a mortgage rate allows you to predict and plan your budget. The certainty makes it easier to look ahead without worrying about interest fluctuations.
- Protects against rising mortgage rates: If rates are on the rise, locking in a mortgage rate keeps your rates low, which can be a relief in volatile market conditions.
- Float-down options: Sometimes lenders will allow you to take advantage of a lower interest rate if the rates decrease during your lock period.
Overall, the pros of locking your mortgage rate may save you money and provide peace of mind, allowing you to budget the rest of your finances with certainty.
The Cons Of Locking Your Mortgage Rate In Canada:
- Missing out on lower rates: If the interest rate lowers drastically during your lock period, you may miss out on these rates. Not all lenders offer float-down options.
- Lock rate fee: Some lenders charge a lock rate fee, which gets added to the cost of your mortgage. This is typically between 0.25% and 0.50% of your loan. Extending your lock time can also come with fees, typically around 0.375% of the loan amount.
- Limits flexibility: Once you lock your rate you’re committed to that lender. If you find a better offer elsewhere, it may be difficult or costly to switch.
The disadvantages of locking your mortgage rate may entail losing out on lower interest rates if the lock is poorly timed and the lender does not offer float-down options. Choosing to lock your mortgage rate may result in an additional fee, so even if you save money on interest, you still pay a bit extra for the privilege of doing so.
Factors to Consider Before Locking Your Mortgage Rate in Canada
How do you know if you may lose out or save money when locking your mortgage rate? It’s tough to predict – even for the experts. However, there are certain factors to consider to make this prediction easier:
- Current market conditions and the future outlook for interest rates: This information requires more than just a cursory Google. You’ll need to consider housing demands, your bank’s predictions, and the current direction of interest rates. Consulting an expert may make this step easier.
- Your financial situation and risk tolerance: Consider if you could afford an increased interest rate or would rather play it safe and lock in the one you know you can manage. If there’s room in your budget for variation, consider if you’d be comfortable with uncertainty or prefer stability.
- The length of the rate lock period: Ensure that this period gives you enough time to finalize your mortgage application and that everything will be processed in time.
- Is there a float-down option? If you’re not sure you’re comfortable losing out on a lower interest rate, find out if your lender offers a float-down option.
Once you’ve considered these factors, the question remains: When should you lock in your mortgage? The ideal circumstances to lock your rate are when rates are low and expected to rise or when you need certainty about your mortgage costs for budgeting purposes. If the circumstances fit these terms, it would be advantageous to lock your mortgage rates.
On the contrary, if rates are high and expected to fall, or if you’re comfortable with the risk of fluctuating rates, you may choose to hold off on locking your rate.
How to Lock Your Mortgage Rate in Canada
It’s easy to understand why you may want to lock your mortgage. But how do you do this in Canada? The process may vary depending on the lender but typically entails:
- Applying for a mortgage pre-approval with a lender.
- The lender reviews your finances and provides an interest rate.
- Clarifying the terms of the rate lock (fees, period, float-down possibility).
Ensure you understand the terms and conditions fully before agreeing to a rate lock. If you’re not sure you like your options, then look for other offers from different lenders to find the best deal.
Conclusion: Should I Lock My Mortgage Rate in Canada?
Choosing to lock your mortgage in Canada can provide a homebuyer with a sense of stability and peace of mind for future mortgage payments and can save money long-term. On the other hand, the exact opposite may also apply. Before making a decision, it’s crucial to do your research and ensure you know the terms of your mortgage rate lock before agreeing to it. Consulting with a financial advisor or mortgage professional can also provide valuable insights and help you make an informed choice.
Remember, homeownership is a significant financial commitment, and every decision related to your mortgage can have a big impact on your financial well-being. So, take your time, weigh your options, and make the decision that’s right for you.