Have you come across an appealing mortgage rate but aren't quite ready to buy? Is your renewal date coming up soon, but you're worried that mortgage rates could rise between now and then? Remember that you can lock in a mortgage rate to benefit from it at a later date.
The interest rate is undoubtedly one of the most important aspects to consider when choosing or renewing the terms of a mortgage. And not without reason, since it can have a major impact on the amount of interest you pay. Many borrowers, therefore, appreciate being able to temporarily lock in a rate they are interested in.
But how does the mortgage rate lock work? And what are the benefits? We'll tell you more.
What does locking in your mortgage rate mean?
A mortgage rate lock is an option that allows you to lock in an interest rate for a set period of time. This generally varies between 30 and 120 days.
The locked-in interest rate is guaranteed, regardless of future market fluctuations. As a result, future buyers have the opportunity to obtain the best available mortgage rate should rates rise.
Why lock in your mortgage interest rate?
Locking in your mortgage interest rate is a good way to ensure you get the lowest rate for your mortgage purchase or renewal.
Here's an overview of the main advantages of locking in your rate:
- Locking in your rate protects you against a possible increase in interest rates;
- It allows you to avoid unexpected payment increases when renewing;
- It gives you peace of mind during the process of buying your home.
However, like anything else, locking in your interest rate can also bring about some disadvantages. The main disadvantage is that if you lock in your rate and interest rates then subsequently fall, you will generally not be able to obtain a lower rate from the same lender.
However, it is important to note that you are under no obligation to take out a pre-approved mortgage with a locked-in rate. You can always opt to take out a contract with another financial institution offering a lower rate.
It is also important to take into account the duration of the rate lock. Is it guaranteed for 90 days? Your transaction must be completed within this period, otherwise, you will forfeit the locked-in rate. If possible, you could decide on a longer period to give yourself time to complete all the necessary formalities.
Why do interest rates change?
Of course, the decision to lock in your mortgage rate would be different if it weren't subject to a number of variations throughout the year. These variations are influenced upwards and downwards by a number of economic factors, such as:
- Market demand: when demand increases, rates can also rise to stabilize the market, and vice versa.
- Fiscal policy and the Bank of Canada's key interest rate. The financial institution sets its target overnight rate eight times a year, thus affecting consumers' mortgage rates.
- Yields on Canadian government bonds.
To avoid last-minute rate rises caused by any one of these factors, many lenders allow their customers to lock in their current interest rate for a certain period.
You should also be aware that the features of your mortgage directly influence the rate you will be offered by the banks.
How can I lock in my mortgage rate?
Have you found a rate that interests you and want to take advantage of it? Simply talk directly to your lender or, better still, contact your mortgage broker. In fact, their contribution is very useful when shopping around for your mortgage rate to ensure that you have the best terms available when you buy or renew your mortgage.
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Would you like to lock in your interest rate on a property purchase? Your mortgage broker can guide you through the mortgage pre-approval process. As well as letting you know exactly how much you can afford to pay for your purchase, you can lock in the current interest rate for a set period.
Are you due to renew your mortgage soon? By contacting your broker in advance, they can shop around for you with different lenders to find you the best mortgage rate. They can also lock in your rate until you officially renew your mortgage.
When should I lock in my mortgage rate?
As already mentioned, a mortgage rate can be locked in as part of a purchase or renewal. However, whatever your situation, it is particularly worthwhile to take out a mortgage when market conditions indicate that an increase in interest rates is imminent. Otherwise, it may be wise to wait to obtain a lower rate.
The decision as to whether or not to lock in your rate also depends on your financial situation and risk tolerance. If you're worried about interest rates going up, it may be reassuring to lock in the interest rate offered.
However, keep in mind that a locked-in rate, or even full mortgage approval, does not guarantee that you will definitely be approved for a loan. A number of factors, such as the loss of your job, could lead to your application being rejected and the pre-approval agreement with your lender being cancelled.
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