Mortgage Rate Lock-in

A mortgage rate lock allows you to freeze a mortgage rate for a few months, usually up to 150 days. When you get a mortgage pre-approval from a lender, you get a guaranteed mortgage offer with agreed-upon characteristics, including the mortgage rate. This mortgage pre-approval with the agreed-upon rate is valid for some months, which makes it a rate hold.

Most lenders offer rate holds of 30, 60, 90, or 120 days, but it is possible to find rate holds for up to 150 days. During the rate hold, the mortgage rate will stay unchanged. If mortgage rates go up during the lock-in period, you can benefit from a lower locked rate. If the mortgage rates decrease, you can get a new lower mortgage rate. So, with a mortgage rate hold, you can get the best rate within the lock-in period.

To get a mortgage rate lock-in, you need to ensure that you have the documentation needed for getting a mortgage. At the end of this process, you would get a confirmation of mortgage loan pre-approval. A lender issues this document and states how much money you can borrow, at what interest rate, with what term and for a certain amortization period. Last but not least, the pre-approval letter would state your monthly payment.

Generally, if you do not have to pay anything for the mortgage rate lock-in, it is worth getting it. A mortgage rate lock-in allows you to get a mortgage faster and potentially at a better rate when buying a house. If a mortgage rate lock-in costs money, you should consider whether it is worth getting it.

A rate hold is similar to an option, a financial instrument. The factors determining the value of any option are the strike price, the expiration date, and the volatility of the underlying asset. If the mortgage rate decreases, the expiration date increases, or the expected volatility of the mortgage rates increases, the pre-approval becomes more valuable.

Volatility measures the typical deviation in the financial variable from its average value. Rate hold mortgage rate is more valuable today than at any time in the recent past due to higher volatility in the mortgage rates. Among the factors affecting the value of your rate hold, mortgage rate volatility is related to macroeconomic factors and is beyond your or your lender's control

Another important factor is the lock-in period length. Typically, lock-in periods for a fixed interest rate last between 13 and 19 weeks. Among major banks, BMO has the longest rate lock-in period of 130 days.

As of March 2024, the benchmark price of a Canadian home is around $730,000, while the average price of a home in Ontario, is $890,000. The table below presents a few typical mortgage situations to consider. In this table, a down payment of 20% is assumed.

This table shows how getting a preapproval 17 weeks before your purchase can save you between $20k to $25k over the first five years of your mortgage payments. In this table, a 5 year fixed rate mortgage is assumed. The saving from a pre-approval could be much larger if a 7-year or 10-year mortgage is used.

You should get a pre-approval for a variable rate mortgage, but locking in your variable rate mortgage does not benefit you substantially. A rate hold on a variable rate mortgage would hold the lender’s spread, but the final rate will be affected by the changes in the prime rate.

Over the past years, variable-rate mortgages have gained considerable popularity due to historically low prime rates. In a variable rate mortgage, your interest is based on the lender's prime rate minus a discount. A pre-approval would hold this discount rate for you, but the volatility in the discount rate a lender offers is very low. Thus there is minimal value in seeking and receiving a pre-approval for a variable rate mortgage.