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. 

Understanding the Impact of Bank of Canada's Decisions on Mortgage Rates

The decisions made by the Bank of Canada (BoC) have a profound impact on the mortgage rates that Canadian consumers face. As the nation's central bank, the BoC sets the target overnight rate, which is essentially the interest rate at which major financial institutions borrow and lend one-day (or "overnight") funds among themselves. This rate directly influences the prime rate that banks charge their customers. When the BoC adjusts the target overnight rate, it sends a ripple effect through the economy, affecting everything from the interest rates on savings accounts to the rates consumers pay on mortgages.

Role of the Bank of Canada

The Bank of Canada's primary mission is to promote the economic and financial welfare of Canada. It does this by managing inflation, a key factor in maintaining a stable and healthy economy. When inflation is high, the BoC may increase the target overnight rate to cool off the economy by making borrowing more expensive. Conversely, in times of economic slowdown, the BoC might lower the rate to encourage spending and investment by making borrowing cheaper.

Impact on Mortgage Rates

Mortgage rates are closely tied to the BoC's target overnight rate. Here's how:

• When the BoC raises the target overnight rate, banks usually increase their prime rates, leading to higher interest rates for variable-rate mortgages and potentially higher rates for new fixed-rate mortgages.
• When the BoC lowers the target overnight rate, banks typically reduce their prime rates, which can lead to lower interest rates for variable-rate mortgages and more attractive rates for new fixed-rate mortgages.

Recent Decisions by the Bank of Canada

By examining recent statements and rate decisions by the BoC, one can gain insights into the direction in which mortgage rates might head. For instance, if the BoC indicates concern about rising inflation, it might signal upcoming rate increases to temper economic activity. On the other hand, statements focusing on economic recovery and the need to stimulate spending might suggest rate decreases or holds are on the horizon.

Implications for Consumers

For consumers, understanding the BoC's actions and their impact on mortgage rates is crucial for financial planning. Here are some key considerations:

• Locking in Rates: In a rising interest rate environment, locking in a fixed-rate mortgage can protect you from future increases. Conversely, in a declining rate environment, a variable-rate mortgage might offer savings as rates drop.
• Budgeting: Changes in the BoC's target overnight rate can affect your monthly mortgage payments, especially if you have a variable-rate mortgage. Keeping informed about the BoC's decisions can help you budget accordingly.
• Refinancing: Knowing when to refinance your mortgage can result in significant savings, especially if you can secure a lower interest rate as a result of changes in the BoC's policy direction.

In conclusion, the Bank of Canada's decisions on the target overnight rate play a pivotal role in determining the mortgage rates offered to consumers. By staying informed about the BoC's actions and understanding their implications, consumers can make more informed decisions about their mortgage options, whether they're buying a new home, renewing, or considering refinancing their existing mortgage.

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.