As a homeowner in Toronto, you may be wondering whether to lock in a fixed rate on your variable mortgage given the rapid rise on interest rates. This is a big decision that can have a significant impact on your finances, so it’s important to understand the pros and cons before making a choice.

What is a Variable Mortgage?

First, let’s define what a variable mortgage is. A variable mortgage is a type of mortgage where the interest rate can fluctuate with the market. This means that if interest rates go up, your mortgage payments will also increase. On the other hand, if interest rates go down, your mortgage payments will decrease.

What is a Fixed Mortgage? 

A fixed rate mortgage, on the other hand, has a set interest rate that does not change for the term of the mortgage. This means that your mortgage payments will stay the same, regardless of changes in the market.

So, why would you want to lock in a fixed rate on a variable mortgage? There are a few reasons:

• Budgeting: With a fixed rate, you know exactly what your mortgage payments will be, making it easier to budget for the future.
• Predictability: With a variable mortgage, your payments can change, making it difficult to predict how much you will need to pay each month. A fixed rate offers predictability and stability.
• Protection: If interest rates rise, a fixed rate will protect you from having to pay more each month.

What are the Costs of Locking in a Fixed Mortgage Rate?

Now let’s talk about the cost of locking in a fixed rate. In Canada, you can lock in a fixed rate at any time during your variable mortgage term. However, there is usually a fee involved.

The cost of locking in a fixed rate can vary, depending on the lender and the term of the mortgage. Generally, the longer the term of the fixed rate, the higher the cost. For example, if you lock in a five-year fixed rate, the cost may be lower than if you lock in a ten-year fixed rate.

It’s also important to note that the cost of locking in a fixed rate can be added to your mortgage balance, which means you will pay interest on the fee over the term of the mortgage.

• Let’s look at an example of the cost of locking in a fixed rate on a variable mortgage in Toronto. If you have a variable mortgage of $500,000 and you want to lock in a five-year fixed rate at 4.99%, the cost to lock in the rate may be around $4,000. This fee can be added to your mortgage balance, so you will be paying interest on the fee over the next five years.

In this example, if you decide to lock in the rate, your monthly mortgage payment would remain the same for the next five years, regardless of changes in the market. This can provide peace of mind and budgeting stability for the next five years.

What is a Mortgage Rate Hold?

It’s also worth mentioning that in Canada, most lenders offer a feature called a “rate hold” which allows you to lock in a rate for a certain period of time, usually 120-180 days, without paying a fee. This can be a good option if you are unsure about whether to lock in a fixed rate or if you are waiting for the best rate.

In conclusion, locking in a fixed rate on a variable mortgage can provide budgeting stability and predictability, but it comes with a cost. Before deciding to lock in a fixed rate, it’s important to weigh the pros and cons and consider the cost. It may also be a good idea to speak with a mortgage professional to understand your options and find the best solution for your financial situation.