When buying presale, it can sometimes be difficult to fully understand the financial commitment you are undertaking, especially when, in some cases, you won’t take possession of your home for 3 years. Understanding what you can afford from a mortgage perspective as well as considering taxes, maintenance fees and any other costs that may be associated with your purchase and ongoing ownership is important. But how do you manage the incertainty of interest rates that can change at any time? The answer: capped interest rates. Capped interest rates are a helpful resource available on many new construction presale communities that address just this issue.

Capped interest rates are interest rates that the bank will commit to for a period of time, usually up to 24 or even 36 months. By going through the approval process with the bank, you can “cap” or create a ceiling for your interest rate based on today’s rate over the duration of construction. For example, if you are approved today with a 3.2% interest rate but the interest rates rise over the next three years to make your new rate 3.8% at the same terms at completion, having a capped rate would entitle you to the original 3.2% rate. This is also particularly helpful when you’re stretching your dollar. As you know, to be approved you must qualify under the 5 year posted rates regardless of the term you select. By getting approved and capping your rate you also have peace of mind knowing that you have qualified under the 5 year posted rate and if rates increase, you will still qualify. If you don’t cap your rate and interest rates rise, you could no longer qualify for your purchase price.

And it gets better! If you decided to cap your rate today and rates stay the same or even decrease, the bank will honour the best rate they can offer at time of completion. Typically, as completion gets closer the bank can sharpen their rate and pass it onto you but you will have the peace of mind knowing that it cannot go above a certain rate.

Many projects will have preferred lenders offering capped interest rates but be sure to go through the process with the lender. If you don’t go through the steps of being approved early on then you will not be entitled to a capped interest rate at completion. Ask a project sales representative or speak to your preferred lender to find out what type of capped rate programs they offer.