Interest rates are going down and borrowers are being faced with the choice of locking or floating their interest rates. Ultimately, whichever you choose will be the decisive factor for all subsequent monthly payments for the duration of the loan. This is why it is not a decision that you should take lightly!
Locking vs. Floating: How does it Work?
When you apply for a mortgage, you will be given the option to either lock or float your interest rate. If you go for the former option, the rate of interest will not be subject to change. On the other hand, if you opt for the float option then the interest rate will fluctuate both upwards and downwards till you decide to lock it.
If you go ahead and lock the rate, then you will have to pay a fixed interest rate on the loan. For example, if the lender decides that your interest rate should be 7% and you are happy with it, then they will lock this rate for you. This will mean that your interest rate will not be subjected to market changes at all. And even if the mortgage rates increase over a period of time, it will not affect your current interest rate.
Unfortunately, this means that there is no way you will be able to take advantage of a drop in the interest rate, provided that it drops lower than your original lockdown value.
On the other hand, if you decide to float your rate, then you will be subject to the vagaries of the financial market. And it can either work in your favor, in case the rates drop lower, or the rate may increase, and you will lose out.
In a nutshell, floating is an inherently risky enterprise because no one can say with absolute certainty what tomorrow holds. This is why the current climate is more conducive to locking because interest rates are already very low. There is a fair chance that they may rebound and you will end up having to pay more.