Can You Lock in a Variable Rate Mortgage?
Mortgage interest rates can be confusing at the best of times. One of the most common questions that mortgage brokers get is “what’s better, a fixed rate or a variable rate?”
Complicating matters even further is the ability to lock in your mortgage. So, can you and should you lock in a variable rate mortgage?
There are a few different options to consider, especially if you’re worried about rising interest rates.
What Is a Variable Rate Mortgage?
First of all, it’s important to know the difference between a variable rate and a fixed rate mortgage.
A variable rate can change during your mortgage term. If the prime rate goes up, so will your mortgage rate. This also means your monthly mortgage payment can go up to accommodate the higher interest rate.
In other cases, banks may adjust the amount of each payment going to interest vs principal while keeping your payment the same. This will slow down how quickly you pay off the actual mortgage amount (principal) and potentially add years to the amortization of your mortgage.
What is a Fixed Rate Mortgage?
A fixed mortgage rate will not change during your mortgage term. This means your interest rate and monthly mortgage payment won’t increase or decrease before your next mortgage renewal, which is usually 5 years.
What Does Locking In Your Mortgage Mean?
Locking In a Pre-Approved Rate
Often, when people talk about locking in your mortgage, they mean holding a pre-approved mortgage rate for a few months.
If you’re preapproved for a mortgage, you can typically hold a rate for 120 days (or 4 months). This is especially useful if you think mortgage rates will increase between now and when you buy your house.
In some cases, you can hold a variable rate, but that only holds your discount off of the prime rate. If the prime rate changes, so will your preapproved rate.
Locking In an Existing Variable Rate Mortgage
Locking in a variable rate mortgage can be another way you “lock in” your mortgage. Essentially, you’re switching your variable rate mortgage to a fixed rate mortgage.
Is there any fine print? Just a bit. Your new fixed term must be at least the length of your remaining variable term.
For example, let’s say you’re 2 years into a 5-year variable rate mortgage and you notice mortgage rates are increasing. You can switch your variable rate mortgage to a fixed-rate mortgage (with at least a 3-year term) so your rate and payments are locked.
Can You Lock In a Mortgage Rate?
It depends on the type of mortgage you have and what stage of the process you’re in:
- Discounts off prime may be locked in variable rate holds for 120 days
- Pre-approved fixed rates can be locked in for 120 days
- Variable rates for existing mortgages can be locked in, or switched to a fixed rate
What Happens When You Lock In a Variable Rate Mortgage?
Different lenders have different policies when you lock in a variable rate mortgage. Because of this, it’s important to confirm the details with your mortgage broker.
Some lenders might charge a fee, but many won’t because you’re still keeping your mortgage with them, just at a fixed rate.
Just remember that have to keep your new fixed rate for the remainder of your mortgage. So if you have 3 years left on a 5-year mortgage, then you will have that fixed rate for 5 years.
What Is the Penalty for Locking in a Variable Rate Mortgage?
Many banks and lenders let you lock in your current variable rate mortgage without a penalty.
That said, this isn’t always the case, so it’s best to review your mortgage documents or ask your lender. Some lenders do charge a penalty, but locking in a variable rate usually has a smaller penalty than breaking a fixed-rate mortgage.
When Should You Lock in Your Mortgage?
If you’re worried about rising interest rates, changing your variable rate to a fixed rate is an option to consider. Even if rates do continue increasing, you’ll be paying the same rate.
That means your monthly mortgage payment won’t continue increasing either. Knowing your payments will be the same can be extremely valuable for peace of mind, especially as other costs increase.
However, there’s also the chance that you lock in a fixed rate, but mortgage rates decrease. Historically, Canadians that chose a variable rate mortgage have paid less interest than Canadians who chose a fixed rate mortgage.
That being said, the post-covid world is very volatile and historical trends may not apply to the current market.
For advice tailored to you, speak to a mortgage broker at Spire Mortgage. We can help you choose the right mortgage option, whether it’s a fixed or variable rate.
