• Should I Lock In My Rate? Should I Renew Early?

    April 25, 2022

    lock into a fixed rate mortgage

    With all of the recent and looming interest rate hikes, we are getting a lot of calls from anxious clients asking if they should lock in (and justifiably so).

    Unfortunately, we can’t answer that question. However, what we can do is help our clients to make an informed decision. 

    Usually the prime rate is adjusted up or down in 0.25% increments. After 2 years of holding the prime rate at 2.45%, at the beginning of March 2022 it was increased by 0.25% to 2.7%. On April 19, 2022, there was a bigger jump of 0.5% to 3.2%. We predict that these increases will continue. We’re just not sure how far they will go and how quickly. 

    For many of our clients, their variable rate mortgages are hovering around 2% (granted there is a lot of variation here depending on when they took the variable rate mortgage). The current FIXED rates are at around the 4% level (again, there is some variation here depending on the specific circumstances). 



    If you are currently in a fixed rate mortgage, you are essentially immune to the current fluctuations in the prime rate until your mortgage matures, that is. Once your mortgage matures, you will be exposed to the same current rates as everyone else. So, if you are in a fixed rate mortgage, you are likely protected by these fluctuations/increases for <5 years. 

    Should you renew your mortgage now?

    Unless you need to refinance, likely not. The current fixed rates are likely higher than the fixed rate you have now. In fact, your fixed rate may even be lower than the current variable rate! You would be locking into a higher rate than what you have now. If you are in a fixed rate and you renew now, you are hoping that when your mortgage matures, the rates at that time will be lower or equal to your current fixed rate. 

    Example: if you currently have a fixed rate of 3% and your mortgage matures in 2 years, if you renew now, you are guaranteed to pay 4%+ for the next 5 years. If you stay put, you continue paying 3%, and then hope that in 2 years, the rates are still at 4% or less. Even if not, those 2 years represent money in your pocket. You could renew into a shorter term, but the gamble is the same. What will the rates be when your mortgage matures? 

    You are only immune to changes until your mortgage matures. 

    If you have a good reason to open your mortgage like refinancing to consolidate debt or renovate, that is a different story.


    If you currently are in a variable rate mortgage and you decide to “lock in”, your rate is likely to jump significantly over night. In our last mail out, we illustrated that on average, the last prime rate hike caused variable rate mortgage holders to increase their monthly payments by $25 per $100K borrowed. If you locked in prior to that increase, they would have jumped by $100 per $100K. That’s a $100/mth increase on a $400K mortgage vs. a $400/mth increase. 

    So both strategies carry their own risks:

    If you remain with the variable, the length of time that it takes to catch up to (or surpass) the fixed rate, is money in your pocket. 

    If you lock in, you will know exactly how much you will be paying for the remainder of your term BUT your payments will likely immediately jump. 

    This is not to mention:

    A.      If you lock into a fixed rate and break the mortgage, the penalty for doing so will likely be much higher than the penalty for breaking a variable rate mortgage.

    B.      If rates continue to climb, you are only “safe” for a limited time until your mortgage matures, then you will be exposed to current rates again at that time.  

    C.     If you passed the stress test when your mortgage was set up, theoretically you can afford to absorb quite a few increases. 


    This is a little bit easier to decide. Although, many of our clients have been pre-approved at fixed rates that are (significantly) lower than the current fixed rates. If you happen to fall into this category, then it is very tempting to take the fixed pre-approval rate. Please see #2 above for the consequences of locking into a fixed rate. Otherwise, if you are deciding whether to take a fixed rate of 4% or a variable rate at 2%, you have to ask yourself the question again: how long is it going to take my 2% variable rate to catch up to 4%? Will it ever? Will it exceed it? The longer it takes, the more money in your pocket in the meantime. If it exceeds it, then the only hope is that the savings in the first portion of the term will offset the costs in the later portion. 


    In conclusion, the most important deciding factor is this: what helps you sleep at night? Both options come with risks. On one hand, if you lock in, you are risking paying more than you have to AND you are risking a hefty penalty if you break the mortgage. On the other hand, if you take (or keep) the variable, you are risking increases which will influence your budget unpredictably, and you are risking that the initial savings will be outweighed by the total costs over the term if it exceeds the fixed rates quickly, and remains there. 


    We hope that helps you make your decision. But if you would like to discuss your particular situation, please don’t hesitate to call. We are always here to help.


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