You can get a mortgage rate hold when you get a mortgage pre-approval. When you're pre-approved for a mortgage, you'll be given an estimate of how much money you can borrow. You'll also know what interest rate you are pre-approved for. This rate can be locked-in for a certain period of time, sometimes as long as 130 days at certain lenders, that won't change even if current market rates change. This means that if mortgage rates go up but you had already locked-in a rate with your pre-approval, then you'll benefit with a lower interest rate.
To get a mortgage pre-approval, and a mortgage rate hold, 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, colloquially known as 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 preapproval letter would state your monthly payment.
A mortgage pre-approval is not a guarantee for receiving a mortgage, but the ability to lock in an interest rate is a powerful feature for mortgage borrowers.
The most critical factors determining the value of any option are the strike price and the expiration date. The same goes for a mortgage rate hold. The lower the mortgage rate and farther the expiration date, the more valuable the preapproval.
The other factor affecting an option's value is the underlying asset's volatility. The more volatile the price of an asset is, the more valuable an option on that asset is. Thus the value of a preapproval increases as the volatility of the mortgage rate increases. Volatility is a quantity ascribed to financial variables (like a rate, asset price, or return of a financial instrument); volatility measures the typical deviation in the financial variable from its average value. Historical volatility of mortgage rates in Canada for different periods is reported in the table below.
|Time Interval||Weekly Mortgage Rate Volatility (Standard deviation)|
|1 year fixed||5 years fixed||3 years fixed||Variable rate|
|First half 2022||0.43||0.25||0.45||0.41|
|Data in this table are calculated using weekly mortgage rates published by the Bank of Canada.|
It is fascinating to note that there has been almost no volatility in Canadian mortgage rates during 2021 and 2019, while in the first half of 2022, mortgage rates volatility has exploded. As a result, rate hold as an option on a mortgage rate is more valuable today than at any time in the recent past. Among the factors affecting the value of your preapproval option, mortgage rate volatility is related to macroeconomic factors and is beyond the control of you or your lender.
You would most likely have already visited the WOWA mortgage rate page and know the rates offered by different lenders. Note that in addition to federal regulations, mortgage lending in Canada is regulated at a provincial level. So to offer a mortgage in each province, a lender or broker must receive a license from that province. As a result, a broker or a lender might not be offering mortgage products in all provinces, and even if they are, they might offer different rates for different provinces.
Thus it is best to check the mortgage rate page for the province where you plan to buy your real estate. WOWA provides a page for mortgage rates in Ontario which is the most populous Canadian province with a population of 14.95m, another page for mortgage rates in Quebec which is the second most populous Canadian province with a population of 8.64 m, and another page for mortgage rates in British Columbia which is the third populous Canadian province with a population of 5.26 m. Mortgage rates in other populous Canadian provinces and territories are also provided, for example, mortgage rates in Alberta which is the fourth most populous Canadian province with a population of 4.48 m, and mortgage rates in Manitoba which is the fifth most populous Canadian province with a population of 1.39 m, and mortgage rates in Saskatchewan which Canada’s sixth populous state with a population of 1.18 m. Pages for other Canadian provinces and territories are also provided, for example, Nova Scotia mortgage rates, and New Brunswick Mortgage Rates. The factors which may differ from lender to lender are the offered rate (the strike price) and the lock period. Our concentration on this page is on the lock period.
|Lender||Rate Hold/Lock Period (Days)|
|Scotiabank||Up to 130|
|CMLS financial||120 (5 years insured only)|
As can be seen in the rate-hold table, typically, your pre-approval holds a fixed interest rate for you between 13 and 19 weeks. The longest hold period belongs to BMO. So to see the amount of savings possible with a rate hold, we consider 17 weeks as the length of a good rate hold offer. The weekly mortgage rate volatility table above is equivalent to the 17 weeks volatility table below.
|Time Interval||17 Week Mortgage Rate Volatility (Standard deviation)|
|One year||Five year||Three-year||Variable rate|
|First half of 2022||1.78||1.03||1.84||1.69|
As can be seen in the table above over a 17 week period, mortgage rates have likely fluctuated of the order of 1%. Currently, the benchmark price of a Canadian home is around $840k, while the average price of a home in Canada’s most populous province, Ontario, is $940k. The table below presents a few typical mortgage situations to consider. In this table benchmark prices for Canada and average prices for Ontario are used as home prices and a down payment of 20% is assumed.
|Sensitivity of monthly payments and total interest cost over the mortgage term to the interest rate.|
|Interest paid over the five-year term||224,112||201,851||247,600||250,792||225,881||277,076|
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.
Over the past year, variable-rate mortgages have gained considerable popularity in the Canadian mortgage market. 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.