Published: December 22, 2020 • Last updated: January 5, 2021 at 17:41 pm
Is There Even Such A Thing As A “Best Mortgage Rate”?
Most people think the mortgage rate is the only aspect of your mortgage that matters.
Don’t get me wrong – your mortgage rate is important, and it will definitely impact your total cost of home ownership, but it is only one of several factors you need to care about, and it may not even be the most important contributor to your cost.
Other factors besides the interest rate on your mortgage can dramatically impact your costs, and often the ‘best’ or ‘lowest’ rate might actually cost you more over the term of your mortgage. I will try to explain why by answering a number of related questions about mortgage interest rates that homebuyers often have.
Why Do Different Lenders Have Different Mortgage Rates?
Every mortgage lender has different guidelines for profit margins, operating costs, risks they are willing to take, types of loans they want to make more of to balance their portfolio, cost of funding a loan, what markets they wish to compete in, whether they are over-exposed to a particular type of risk or borrower, and so on.
While the major banks tend to follow each other, (like gasoline prices) they are competing for business and aren’t always in lockstep. Every now then a bank will offer a promotional rate which their competitors choose not to match. (This year, one of the banks had a spectacular Black Friday rate offer for example)
These variables can mean the same mortgage product to the same type of homebuyer is priced differently between lenders.
What Factors Can You Control Regarding Your Mortgage Rate?
You have some control over how risky you and the mortgage you want appear to a lender. The principal factors which matter here are your credit score, the size of your down payment, and the type and location of the property you are buying.
If your down payment is less than 20% of the purchase price (in other words, if you are borrowing more than 80% of the home’s value) , then you are required to purchase mortgage default insurance (MDI). Ironically, if this is you, the lender is protected against default, and you will usually end up with a lower interest rate than someone who doesn’t have to buy insurance, because the lender’s risk has been completely eliminated.
Your credit score is a rating of how reliably you pay your bills and how you handle debt, so a higher score means less risk, which also means you may get better mortgage offers. That said, once you are over the minimum threshold (680) there is no reward for having a score of 780 or even 880.
The other things you can control are what type of property you’re buying (e.g. investment property, vacation home, mixed use etc.), and where it’s located (in a major city versus smaller town or rural).
Location matters because properties in major cities are always in high demand and easier to sell should you default, so are less risk to your lender.
Why Is Your Mortgage Rate Different From Your Friend’s Mortgage Rate?
Even if you and your friend are both in similar neighborhoods in the same city, have similar incomes and similar down payments (similar loan-to-value ratios), then there could still be several reasons your mortgage rates are different.
- You may have different types of mortgages (fixed versus variable rates) or different terms. In general, fixed rates and longer terms have higher rates.
- You may have very different credit scores if one of you has had some late payments or unpaid bills in your credit history. Or perhaps one of you has mistakes on your credit report affecting your score adversely, and therefore the rate you can get.
- Mortgages from different lenders can have very different “bells and whistles.”
- Mortgage portability (the ability to take your mortgage with you to a new home) and assumability (the ability for a buyer to take over your mortgage) are also things which may account for interest rate differences.
- One of you could have gone to your home bank where all your accounts are, while the other may have used the services of a mortgage broker to shop around for the best combination of rates and terms to match your needs. As with most things, it pays to get competitive offers.
Why Does The Term Matter To My Mortgage Rate?
The term is the length of time you are contracted to your mortgage lender with the conditions and terms you signed up for. Shorter terms will normally have lower rates, so if all you care about is rate, you may prefer to take a series of one or two year mortgages, versus locking in for five or even ten years. Personally, I am not a big fan of that approach, but it works well in a falling rate environment, that’s for sure.
Why Are Mortgage Rates Different By City And Province?
Location matters a lot to the risk calculation because it can dramatically affect the lender’s ability to recover what you’ve borrowed should you default.
The economies of larger towns and cities tend to be the most robust and diversified, meaning property values are more likely to rise, and should the borrower lose their job, it’s far easier to find another. Either way, if the lender has to foreclose and sell your property, it’s much easier to find another buyer quickly than it is in a rural or remote village.
As well, some provinces are more subject to boom and bust economies (especially if they are resource intensive, such as the oil industry). In those types of economies, frequently an entire region is affected by job losses or depressed prices, making it much harder to sell a property in a down market. This may mean higher interest rates, all things being equal, because the lender is exposed to higher risk.
Why Are Advertised Rates Not Always Available To Borrowers?
When lenders advertise a low rate, you should really think of it as a promotion designed to get you in the door so they can sell to you. It might be only a small percentage of people can actually qualify for that rate, or in fact want it, because there are several parameters or conditions that go into it.
For example, it might only apply to borrowers with a credit score above 720, or be available to people who require a specific loan-to-value. (Often it’s the high ratio borrowers who are offered the best rates).
And, it could be very restrictive, with huge prepayment penalties, or a sell-only clause, or not even be portable. In other words, it’s about all the boxes you need to tick to get it, and it could well be a loan that is undesirable for other reasons.
See the table below for typical restrictions on promotional rates:
- Must close within a specific period of time. For example, 30, 45 or 60 days.
- May have high prepayment penalties. For example, some promo VRM’s may charge 3% of the remaining balance! The younger you are, the more likely you are to break your mortgage before your five-year term expires. This is important!
- May not allow you to refinance. You may only break the mortgage if you are selling your property or staying with that same lender.
- Low prepayment privileges. 20/20 is best; 15/15 is fine; some promos may offer much less like 5/5 or 10/10. (20/20 means you can increase your regular payment by up to 20%, and apply a lump sum payment of up to 20% of the original mortgage balance once per year.)
- May only be available for high-ratio purchases. This mean you may not have a down payment greater than 20%.
- May not be available for refinances or renewals.
- May only be good for owner-occupied homes. This would not apply to rentals or investment properties.
- May be restricted to a specific amortization period. For example, a maximum of 25 years.
- May charge a mortgage insurance premium, even with a 20% or more down payment.
- May not offer a portability feature.
So, not only do few people qualify for it, but an even smaller subset find it desirable. And, the property itself may need to qualify by location (only in a geographic area) or type (no investors need apply).
Why Is A New Mortgage Rate Different From A Refinance Rate?
Refinances are not insurable and as a result cannot command rates as low as those where the lender is protected by mortgage default insurance.
How Do I Find The Best Mortgage Rate?
You will rarely get the best rate if you only inquire at a single lending institution and receive a single offer based on the products that they sell.
It’s good to compare several lenders and match their offers to what you want in a mortgage and your specific needs, and the best way to do that is to consult with a reputable mortgage broker who will scour the market for you and find the best alternatives and lowest rates you are qualified for.
Brokers have access to dozens of lenders who compete for your business, and their services are almost always free to the consumer. It’s a no lose proposition.
How Do I Get The Best Mortgage Rate?
This is a slightly different question than how to find the best mortgage rate, because getting the best rate is dependent on you and the home you want to buy. Getting the best rates isn’t just about finding them, but about qualifying for them.
Do these things to have the best chance to qualify for the best mortgage rates:
- It is really important to have good discipline in your personal finances, and especially in managing your ‘credit hygiene’.
- Being a strong saver will also help, as you need to cover your down payment and also your closing costs, which can be quite substantial.
- Decide your mortgage term, and also whether or not you wish to have a fixed rate mortgage or a variable rate mortgage.
- Another major factor is your amortization period. If you wish the lower payments accorded a 30 year amortization period, you may have slightly higher rates than people who stick to 25 years or less. That said, if you are making a high ratio purchase, you will have no choice but to stick to 25 years or less.
What Does It Mean To Lock In A Mortgage Interest Rate?
When you get officially pre-qualified for a rate, most lenders will guarantee that rate for up to 120 days, giving you time to shop for a new home and close on your purchase. Some will go for far longer, especially if you are being approved for a pre-construction purchase.
A rate lock protects you against the risk that rates will go up before you can close your deal, and importantly it has no risk to you because if rates come down, you’ll get the lower rate. This allows you to shop for a new home with confidence, knowing exactly what you can afford, and being able to predict what your monthly payments will be.
Does It Pay To Shop Around For The Best Rate?
Obviously if you can get a better rate for the same type of mortgage, why wouldn’t you? However, simply shopping for the best rates doesn’t consider all the other variables that make the mortgage right for you, and it is harder for a homebuyer to do on their own without access to the many lenders who aren’t major banks.
We recommend you find a mortgage broker you’re comfortable working with, and let them do the shopping for you. Their relationships with dozens of lenders, including major banks, will ensure you get competitive offers for the type of mortgage you need.
You will almost certainly get the best rate you’re qualified for this way, and it will be much less work and stress for you.
What’s The Difference Between APR And The Interest Rate? Why Are There Two Different Interest Rate Numbers For Every Loan?
The annual interest rate on your mortgage is what’s used to calculate your monthly payments. It is the actual ‘real’ interest rate.
APR is an acronym for ‘annual percentage rate’, and it is intended to make comparison between mortgages easier by including all of the other costs such as fees, prepaid interest, closing costs, insurance, in addition to the interest rate, and then calculating what the interest rate would be if all these costs were included.
APR will always be higher than the interest rate because it includes all these costs, but it makes it more obvious which loan has the best total cost (the lowest APR).
How Is The Mortgage Payment Calculated?
In Canada, mortgage rates are quoted based on an annual rate, but most of the time they are compounded semi-annually (every six months). That’s where the math gets confusing.
We have provided some handy calculators on our site where you simply have to plug in the interest rate, amortization, mortgage value and term and it will tell you the monthly payment to expect.
What’s The Difference Between A Variable And Fixed Rate?
A fixed rate mortgage guarantees you a constant interest rate for the term of the mortgage, and most people choose 5 years, though there are available terms of 6 months, 1, 2, 3 and 4 years too. Normally, the rate will be a bit higher the longer the term.
People generally choose fixed rate mortgages and a longer term because they want the peace of mind and financial security of knowing what their monthly payments are going to be, especially if they are budgeted right up to the maximum they can afford.
In the “State of the Mortgage Market” report for 2019 released by Mortgage Professionals Canada, approximately 74% of Canadians chose fixed rate mortgages, so this is the most common type of mortgage today.
With a variable rate mortgage, the rate and payment changes according to the prime rate published by your lender, and this is linked directly to the Bank of Canada rate.
Because the consumer is assuming the rate fluctuation risk, variable rate mortgages are almost always offered at a lower rate than fixed rate mortgages. Your payment will usually vary with changes in the bank prime rate, though there are some variable mortgages which hold their payment steady, and instead vary the amount of principal you are repaying each month.
For more than 30 years, as inflation and interest rates have trended steadily downward, consumers who opted for variable rates have tended to do much better than those who opted for fixed rate mortgage in terms of long term cost, but this could change, especially if we enter a period where inflation and interest rates start heading back up. For what it’s worth, in 2020 the Bank of Canada indicated they expect rates to remain low until at least 2023.
If you require the comfort and financial security of knowing your payments will stay the same for 5 years, then a five year fixed rate mortgage is for you. And these days, some people are seriously considering a ten year term.
Let’s review the things most likely to prevent you from qualifying for the best rates on your new home purchase.
Top Five Reasons You Won’t Qualify for the Best Mortgage Rate
- Low credit score. Low credit score means higher risk to lenders, and all risks must be blended into the cost of whatever rate you are offered. If your credit score is safely above 680, there’s nothing derogatory on your history, and everything else checks out, you’ll likely qualify for the best rates available to you for what you’re buying. You can still get a mortgage with a lower score, and probably for decent rates, just don’t expect the very best.
- You don’t want to buy mortgage default insurance (MDI). Mortgage default insurance costs money that most would prefer not to spend if they don’t need to. However, lenders have much lower risk when you have MDI, and will therefore offer lower rates to those customers that have it.
- You want to buy an unusual property. Lenders like to know they can sell a property fast and for a good price if the need ever arises. Cottages, former grow-ops, unusual building structures or restrictions on usage – all of these make it hard, or impossible, to get the ‘best rate’. Also, it’s important you intend to live in the home as your principal residence, rather than as an investment property.
- You want more flexibility. Do you want mortgage portability? The ability to make lump-sum prepayments? The best rates are sometimes tied to the most restrictive mortgages so be sure to ask about this.
- Location where you are shopping for a home. Rates can vary by province and major cities versus rural or remote areas. If you are shopping anywhere where it would be harder for the lender to sell your property in the event of a default on your mortgage, then you may be quoted higher rates.
Once you understand what type of mortgage you need, and what kind of mortgage client you are, then you can select the best rate possible.
There is no “one-size-fits-all” best rate, rather each client type and and set of needs will qualify for their own best rate, including:
- High-ratio purchases (insured, between 5-20% down payment). These are often favored by first time buyers, but can be used by anyone actually.
- Conventional purchases, type 1. At least 20% down payment, and under one million dollars.
- Conventional purchases, type 2. At least 20% down payment, and over one million dollars.
- Transferring or switching mortgage lenders with no new money or changes in terms. Rate may depend on whether or not this mortgage is “insurable”, but generally these rates are pretty great.
- Rental Properties. These rates are always higher than owner occupied properties.
- Bad Credit Mortgages. Now you are in the world of alternative lenders who specialize in serving this market.
- Self-Employed Mortgages. Best you just ask if this is you.
- Private mortgages. If you fall outside the guidelines of both ‘A’ and ‘B’ (alternative) lenders, you may still qualify for a mortgage through a private lender. These are mortgages designed to solve problems or deal with very specific or unique needs, come with higher costs, and are not for everyone. If you think you might be in this category, we recommend reading our series of articles on private mortgages that takes a deep dive into why and when you might need such a loan, and how much they cost.
The best advice to qualify for your personal best mortgage rate is:
- Know what type of mortgage is right for you (fixed or variable, term length and amortization, whether you need/want insurance, etc).
- Manage your credit hygiene, so that you’ll have the best credit score possible when you’re ready to take the leap
- Know that mortgages with the ‘best rates’ might be the ones with the highest total cost because of restrictions, such as a restrictive sale clause. Also, they might take a very long time to get an approval – because market leading rates attract a LOT of attention.
- Plan your down payment strategy so you’re ready to pull the trigger when the time is right for you to get into the real estate market.
- Work with a reputable mortgage broker who will hold your hand through the process, advise you based on your needs, and get the best competitive mortgage rate offers for your situation. S/he will find you the lowest rates you are qualified for, and can provide high levels of service, support and advice to ensure your loan closes as smoothly as possible.
- Don’t Listen To Interest Rate Predictions
- Mortgages 101 — What You Need to Know Before Applying For a Mortgage
- First Time Homebuyer Mortgage Checklist
- What Type of Mortgage Is Right For You?
- Important Factors In Selecting Your Mortgage