Published: December 15, 2020 • Last updated: March 16, 2021 at 9:31 am
Reputable mortgage specialists do not believe the number one factor in selecting a mortgage is the interest rate. 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.
You might opt for a shorter term if you know you will move or sell in two to three years, but most Canadians default to a five-year term, which is advisable unless you have a specific reason not to.
With dozens of lenders at our disposal, new rates are available almost daily. A promotional rate often comes with some restrictions, so ask questions… ASK ROSS… and find out exactly what you are getting and if it is right for you.
Different Rates For Different Folks
Any given lender or mortgage broker will be able to tell you their best rate for:
- Hi ratio purchases (insured)
- Conventional purchases (at least 20% DP) under one million dollars
- Conventional purchases (at least 20% DP) 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”.
- Refinancing an existing mortgage – whether it’s to to grab a lower rate, or to take out some equity and increase the mortgage amount. Such rates are often higher than purchase rates.
- Rental Properties. Such rates are higher than owner occupied properties.
- Bad Credit Mortgages. Now you are in the world of alternative lenders.
- Self Employed Mortgages. Best you just ask if this is you.
So there truly is no “one size fits all”.
As far as mortgages are concerned, there is a segment of the population whose only concern is their interest rate – it has to be the absolute lowest, no matter what. But it should matter!
If all you care about is a rate, there are a couple of excellent rate sites you can readily find with your search engine. Just be sure you know what you are doing. For example, in our experience, first-time buyers are not yet comfortable with rate sites, since they value the personal experience, and they don’t know what they don’t know about buying a home and mortgage financing.
Repeat buyers and long time homeowners may be more comfortable with rate sites.
When Might Rate Not Be The Most Important Consideration?
Of course, there are borrower types who care much more than just about the rate – they may not be sure if they even qualify for a mortgage, and if so, with what restrictions.
For example, we have seen many examples this year where our clients wanted to buy a second or even a third property. This really is a minefield and the primary consideration is often finding a lender who has the most favorable approach to rental income and expenses, and hope you can live with their rates.
Here are some scenarios where rate is not the biggest concern:
* When you have a very short condition of finance in your purchase offer, you go to a lender who is known for fast approvals. No point in going after the best rate if that lender is taking two weeks to underwrite all new applications.
* When you need an exception allowing you a higher debt service ratio – for example 43% rather than the normal 39%. THAT is what you care about most; and rate is a secondary consideration.
* When you are converting your home to a rental and buying a new home to live in. You want to carry two mortgages and not every lender is going to be cool with that. You may need the lender with the most favorable approach towards rental income and expenses.
* And if you are buying a rental property, you can forget lowest rates. You need a lender who “gets it” when you present all your properties. The approval is what you care about first and foremost. Rate is a secondary consideration.
* When your credit score is below 680, you will not have your pick of all the lenders. Your broker will steer you to the best of the rest.
* When you are self employed and are proud about how low your personal income is on your income tax return, you will be grateful to find ANY A-lender who will give you a decent mortgage rate. The best and lowest rate is NOT for you.
If you have questions or uncertainty, you will want to work with someone who lives and breathes mortgages all day long. Ideally this person has access to dozens of different lenders, because they are not at all the same.
Anyway, if you plan to focus only on the rate, don’t be blind to some of the other important considerations which should go into your mortgage selection process. Here are examples of some of the things you should consider. Decide which ones matter to you before you sign away the next five years.
EXAMPLES OF POSSIBLE RESTRICTIONS OF PROMOTIONAL MORTGAGE 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.
- May only be available for high-ratio purchases; not those with 20% or more down payment.
- May not be available for refinances or renewals.
- May only be good for owner-occupied homes, not rentals or investment properties.
- May be restricted to a specific amortization period. For example, a max of 25 years, or not less than 20 years.
- May charge a mortgage insurance premium, even with a 20% down payment.
- May not offer a portability feature.
All that said, we do understand we are in a competitive business, and we always promote our best available promotional rates – if they fit your personal circumstances, then sure, why not?
Ten obstacles to getting the best interest rate
by Robert McLister
“Anyone with a mortgage wants the lowest possible rate. But there’s an array of requirements for snagging the best all-around deal, and some of them are counter-intuitive.
Once people have chosen the term and rate type for their mortgage, they often find that rates for that same term can vary by a percentage point or more. Countless factors can keep borrowers from getting a rock-star deal. Here are 10 of them:
- Rates vary by province
Ontario usually has the most competitive rates in Canada, partly because it has the greatest number of competitors. People living in the Prairies or the East Coast, for example, often pay one-tenth to two-tenths of a percentage point more than folks in Ontario.
Other examples: Home owners in Alberta sometimes have to put down more equity to get the lowest available rates (thanks to larger default risks in that province); borrowers in Manitoba have the cheapest six-month rates; borrowers in Quebec have some of the best 10-year rates.
- A long rate hold
The further into the future your closing date, the longer the rate guarantee you’ll need. In turn, the higher a lender’s rate hedging costs and the higher your interest rate.
The cheapest rates in the market are generally for “quick closes.” That typically means you must complete the mortgage in 30 to 45 days from applying. Applying one month from closing can shave off one-tenth to two-tenths of a percentage point from your rate, but the risk is that rates jump even more while you’re waiting.
- You’re refinancing
Lenders love to finance purchases. So mortgages for new buyers sometimes have lower rates than mortgages for refinances. What’s more, refinances, which essentially require a whole new mortgage, often have lower rates than mortgage transfers, where you’re switching lenders but the key mortgage terms stay the same.
- You’ve got an apartment condo or atypical property
Some lenders charge more for high-rise condos, especially in cities where condo markets are arguably overextended. The same goes for cottages, co-ops, hotel condos, former grow-ops, larger multiunit residences and other non-standard structures, which lenders view as higher risk.
- The property isn’t your full-time dwelling
The cheapest rates in the country rarely apply to income-generating properties that the owner doesn’t live in. These deals are statistically a higher risk for lenders and investors, so expect a higher interest rate.
- Your credit score isn’t high enough
The magic number is 680. That’s the most common minimum credit score to qualify for the best rates, especially if you have a higher debt ratio or a smaller down payment. But one number isn’t everything. To qualify for the best pricing you also need a two-year track record of managing your credit with no serious delinquencies.
- You want flexibility
Some of the nation’s lowest rates come with strings attached, such as below-average prepayment privileges. This limits your ability to save interest by making lump-sum extra payments. Instead of prepaying 15 per cent to 30 per cent annually (which few people do anyway) a “no frills” rate might limit you to prepaying 5 per cent or 10 per cent. Restricted mortgages can also impose painful penalties, prohibit you from refinancing elsewhere before your term is up and prevent you from increasing your mortgage without penalty – useful if you buy a new house.
- Your mortgage is not insured
In many cases, people with smaller down payments – less than 20 percent – get better rates. That’s because their mortgage must generally be insured. Lenders like insured mortgages because someone else shares the risk of the borrower defaulting.
- Your mortgage is too big
For lenders, bigger mortgages mean potentially bigger losses on default. This added risk results in rate premiums
and stricter lending limits, especially on million-dollar mortgages without at least 25-per-cent to 35-per-cent down payments.
- Your income is too low
If you’ve just become self-employed, are on probation or you can’t prove one to two years’ worth of stable salaried income, it can cost you. You may also need a bigger down payment. Lenders want less than 40 per cent to 44 per cent of your provable income to go toward debt.
In looking at this list, you may surmise you’ll get the best deal if you have pristine credit, don’t care about mortgage restrictions and are buying a detached urban home in Ontario that’s closing in 30 days.
That all helps, but there’s plenty more that governs mortgage pricing. Step one is knowing how well qualified you are. The stronger you are as a borrower, the more likely you’ll find exceptions to the rate “rules” above.”
Rates of Interest – Variable vs. Fixed
One of the most important decisions you’ll have to make when looking at what sort of mortgage to pursue is your rate of interest. There are two ways to choose to pay interest when it comes to mortgages and they are broadly known as variable and fixed.
The terms “variable” and “fixed” refer to whether your mortgage rate can change during the term.
As the names imply, a variable interest rate will go up or down as the Prime Rate changes over the course of a mortgage term. A fixed interest rate will stay the same for the length of your mortgage term no matter what happens to the Prime Rate.
You will see mortgage rates are categorized by length of the mortgage term and whether the rate is fixed or variable.
The biggest discounts are often provided to those willing to take on the uncertainty of a closed variable mortgage. Most places will list their current variable mortgage rates as Prime – X%.
There’s also a niche option called a hybrid where you can actually have each: part fixed and part variable. Few people go this route. (Personally, I don’t see the attraction)
The Prime rate of interest is the interest rate that a bank gives its “most trusted” or credit-worthy customers. It’s influenced by the Bank of Canada’s overnight rate (a.k.a. key interest rate). When you hear the Bank of Canada lowered the key interest rate, this means you should be able to borrow money at a lower rate of interest going forward.
Most big financial institutions will have the same Prime Rate, but it doesn’t hurt to double check with your lender, especially if the Bank of Canada has just changed the key interest rate.
When you are comparing mortgages, finding the best combination of interest rate and term could save you hundreds or even thousands of dollars over time. That’s why it’s important to “compare apples to apples”.
At the very beginning of the client relationship is the time to get your best interest rate. And understand this – you can convert from your VARIABLE RATE MORTGAGE to a fixed rate at any time, but you will likely not get as low a rate as the new buyers selecting a fixed rate mortgage from the get go.
For many folks, however, paying the very rock bottom amount of interest over the course of their mortgage is not the only relevant consideration. Some are afraid of not being able to make the monthly or weekly payments if interest rates go up. (That’s why I personally like one of our lender’s offerings where they keep the mortgage payment constant, even though the rate is variable. That’s very cool. What varies is the amount of principal owing at the end of the mortgage term.)
Others hate the rigmarole of negotiating a new mortgage term every year or so. (Even though with internet comparison shopping this process is now easier than ever before).
You need to decide if you can live with the risk of higher interest costs, and their associated higher monthly payments. It’s certainly not for everyone. I believe this is not a matter of making the technically “best financial decision”. Rather it is much more about what you will be comfortable with.
It is true many long-term studies which looked at decades-worth of data have concluded the majority of people would have paid the least amount of money over the course of their mortgage by steadily using short-term, variable mortgage rates, and renegotiating frequently. But so what? That was in the past, and here we are now.
During the COVID-19 pandemic, the gap between fixed and variable rate five-year mortgage rates has really narrowed – rendering variable rate mortgages far less attractive than in years past. Coupled with fixed interest rate mortgages below 2%, there is less desire to go variable than at anytime in the past twenty years or so.
It’s very hard to tell where rates are headed six months out, never mind over five-to-ten years. I published an article on this very topic years ago, and it’s still true today. (Though the Bank of Canada has gone on the record and told us we can expect continued low rates till at least 2023)