Whether you are buying a property or your renewal is around the corner, the process can stretch over several weeks, even several months. In the meantime, interest rates keep moving, and a single rate increase can add hundreds of dollars to your monthly mortgage payment.
The good news is that you can lock in your mortgage rate. Here is how a mortgage rate hold works, how long it lasts and which questions to ask your lender before you commit.
In brief
- A mortgage rate hold lets you reserve an interest rate for a set period, protected from market increases.
- Most lenders guarantee a rate for 90 to 120 days, and some go up to 180 days at renewal.
- A half-point increase on a $400,000 loan can cost close to $9,600 in additional interest over a five-year term.
- A guaranteed rate is not approval: before confirming your financing, the lender still has to appraise the property and review your file.
- Protection if rates drop, rate hold extensions and variable rate holds vary from one lender to another, so it is worth asking.
What is a mortgage rate hold?
Holding your mortgage rate is a bit like booking a plane ticket at today’s price. The lender commits to giving you a specific rate for a set period, no matter what happens in the market. You may also hear the terms rate guarantee or rate lock: all three refer to the same thing.
If the expiry date passes before you sign, the guarantee ends and you start over with the rates in effect at that time.
The benefits of locking in your mortgage rate
Reserving a rate in advance comes with several concrete advantages:
- Protection against rate increases: if rates go up while you are looking for a property or waiting for your renewal, your reserved rate stays the same.
- A budget you can plan ahead: you know exactly how much your mortgage payments will be and can set a realistic purchase price.
- Peace of mind: no need to follow every Bank of Canada announcement, so you can focus on your project.
- The chance to benefit from a drop: many lenders adjust your rate before signing if rates go down.
- A service that is usually free: most financial institutions offer a rate guarantee at no cost.
How long can you hold a mortgage rate?
In general, lenders guarantee a rate for 90 to 120 days. This is not a fixed rule, however: depending on the financial institution and your situation, the period can range from 30 to 180 days.
The length mostly depends on why you are locking in your rate. There are two possible situations: buying a property and renewing your mortgage.
1. Locking in your rate when buying a property
For a first purchase, the rate hold usually comes with mortgage pre-approval. Before you even start visiting homes, you provide the lender with proof of income, a list of your debts and the amount of your down payment. The lender then tells you how much you can borrow and reserves your rate, generally for 90 to 120 days.
Keep in mind that a guaranteed rate is not approval. Before confirming your financing, the lender will need to appraise the property and review your file a second time. Until the signing, it is best to avoid any major change to your financial situation.
From the offer to purchase to the signing
Once your offer is accepted, the lender appraises the property and confirms your financing. Your guaranteed rate then stays with you until the signing at the notary’s office. Only one thing to watch: the signing date must fall before your rate hold expires.
2. Locking in your rate at mortgage renewal
As the end of your term approaches, you can also reserve a rate several months ahead of your renewal. Most lenders allow you to do so about 120 days before the maturity date, and some major financial institutions go as far as 180 days.
Ideally, you should start the process four to six months before your renewal date. If rates rise in the meantime, you are protected. If they drop, most lenders give you the best rate available at maturity.
Using your renewal to review your mortgage
When you renew your mortgage, your rate is not the only thing up for negotiation. You can also review your terms, such as the amortization period or the payment frequency, and even switch mortgage lenders. Those few months of lead time give you room to compare offers from several lenders instead of accepting the first one that comes along.
Why lock in your rate?
Mortgage rates change constantly. Several factors influence them, such as Bank of Canada decisions, inflation and the overall health of the economy. When one of them shifts, lenders can adjust their rates quickly.
Is half a percentage point really that significant?
Take the example of a $400,000 loan amortized over 25 years. At an annual interest rate of 4.5%, monthly payments come to about $2,214. At 5%, they rise to about $2,326, or $113 more every month. By the end of a five-year term, that gap adds up to close to $9,600 in additional interest.
No one can predict the next rate increase or decrease with certainty. A rate hold lets you set that risk aside: by reserving your rate in advance, you know exactly what to expect, whichever direction the market takes.
Rate hold: 3 questions to ask your lender
Not all rate guarantees are created equal. Before you commit, these three questions will save you a lot of surprises.
1. Will you adjust my rate if rates go down?
It is a common worry among borrowers: locking in a rate, only to see rates drop a few weeks later. Fortunately, many lenders offer downward protection: if their rates go down before the signing, they give you the lower rate.
Some promotional rates, however, exclude this protection. It is best to confirm with your lender: the goal is to get the best rate possible while keeping some flexibility.
2. Can I extend my rate hold?
A delay at the notary’s office or a negotiation that drags on, and your signing date can easily go past the guaranteed period. Many lenders will then agree to extend the guarantee, sometimes for free, sometimes for a fee.
Timing is key: the request must be made before the expiry date. Once the guarantee has expired, you will need a new one, at the current rate. It is therefore best to know your lender’s rules from the start so you are not caught off guard.
3. Can you lock in a variable rate mortgage?
If you are leaning toward a variable rate, do not assume a rate hold is available: not all lenders offer one, and when they do, it works differently.
A variable rate mortgage follows the prime rate, which moves in step with the Bank of Canada’s key interest rate. What is guaranteed is not the rate itself but the discount, for example prime minus 0.60%.
Protection is therefore more limited for variable-rate loans than for fixed-rate mortgages. Understanding what your lender guarantees will help you choose the type of rate that suits you.
The role of the mortgage broker
A mortgage broker can guide you from the moment you lock in your rate until the signing. The broker compares offers from several financial institutions on your behalf, helps you choose the guarantee that best fits your timeline and keeps an eye on the expiry date.
Rates are dropping or the signing is postponed? The broker handles the follow-up with the lender. And good news: in most cases, their services cost you nothing, since the lender pays their compensation.
Looking for a mortgage broker for your renewal?
Habitam can help you in your efforts to find a mortgage broker. By telling us about your project, we will refer you to top-rated experts, free of charge! Simply fill out the form (it only takes 2 minutes) and you will be put in contact with the right experts.
