How a Mortgage Rate Hold Can Help You Save on Interest Amid Rising Rates
As the Bank of Canada raises its benchmark interest rate for the first time since January, many Canadians are concerned about the potential impact on their mortgage payments. However, there is a strategy that can help borrowers mitigate the risk of paying more interest if rates continue to climb: a mortgage rate hold. In this article, we’ll explore how a mortgage rate hold works, why it can be an effective tool to navigate the current interest rate landscape, and discuss important considerations when opting for a rate hold.
Understanding the Mortgage Rate Hold
A mortgage rate hold allows borrowers to secure a specific interest rate for a designated period, typically ranging from 30 to 120 days. During this time, even if interest rates rise, the borrower is protected and can still secure a mortgage at the lower rate they held. This provides peace of mind and financial stability while searching for a property or finalizing a mortgage application.
The Benefits of a Mortgage Rate Hold
By opting for a mortgage rate hold, borrowers can shield themselves from the volatility of interest rate fluctuations. Even if rates continue to rise, those with a rate hold will not be affected during the hold period and can secure a mortgage based on the lower rate they secured. This can result in significant long-term savings, as borrowers can avoid higher rates and potentially save a substantial amount of money over the life of their mortgage.
For example, suppose you get a mortgage rate hold of 2.5% for 120 days, and interest rates increase to 3.5% before you finalize your mortgage. If you have a $400,000 mortgage with a 25-year amortization, you would pay $1,794 per month at 2.5%. However, at 3.5%, your monthly payment would increase to $1,995. This difference of $201 per month adds up to a staggering $60,300 over the term of your loan. A mortgage rate hold can provide substantial savings and significantly impact your financial well-being.
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Applying for a Mortgage Rate Hold
To obtain a mortgage rate hold, you need to apply for pre-approval with your lender. A pre-approval is not a guarantee that you will secure the mortgage, but it gives you an idea of how much you can borrow and the interest rate you qualify for. It also demonstrates your seriousness as a buyer to seller. However, it's important to note that a mortgage rate hold may not always be advantageous.
Considering the Downsides of Mortgage Rate Hold
While a mortgage rate hold protects borrowers from potential interest rate increases, it can also prevent them from benefiting if rates decrease during the hold period. If rates go down, borrowers may be stuck with the higher rate unless their lender allows them to switch to the lower one. It's crucial to carefully review the terms and conditions of the rate hold agreement, as some lenders may charge a fee for this option.
Factors to Consider
A mortgage rate hold is just one aspect to consider when selecting a mortgage. Factors such as the type of mortgage (fixed or variable), the term (duration of rate lock-in), the amortization period, and the payment frequency all play significant roles. Additionally, it's essential to compare different lenders and shop around for the best mortgage deal.
Consulting Mortgage Professionals
Making informed decisions regarding a mortgage rate hold requires consulting with mortgage brokers or lenders. These professionals offer guidance based on individual circumstances and market conditions, ensuring borrowers choose the most suitable option. They provide insights into the current interest rate landscape, forecast future rate movements, and assess the potential savings or risks associated with a mortgage rate hold.
Conclusion
In an environment of rising interest rates, securing a mortgage rate hold can provide peace of mind and financial protection for homeowners and prospective buyers in Canada. By taking advantage of this strategy, borrowers can navigate the uncertainty of interest rate fluctuations while potentially saving a significant amount of money over the term of their mortgage. Remember to consult with mortgage professionals to explore the rate hold options available and make an informed decision that aligns with your financial goals. With a mortgage rate hold in place, you can proceed with confidence, knowing that you have taken steps to safeguard your budget and future financial well-being.