If only we could buy homes without all the paperwork, fees, rates, and nuances. The excitement is in the browsing, in seeing yourself and your family in each room, and building a lifetime of memories. The stress comes when you must purchase, secure a mortgage, and pay all the professionals helping you with that hard-earned money to close the deal.
The best mortgage rates come from a variety of lenders that include banks, credit unions, mortgage brokers, and even online companies. It’s a landscape that’s worth spending the time to explore, so you get the best mortgage rate possible. A perceivably small .25 of a percentage point when multiplied against $100,000s of dollars can have a significant impact on your monthly payment, total interest, and quality of life. So, let’s get started with some basics on what a mortgage rate is.
A mortgage rate is the interest charged on your loan. They can vary significantly depending on who you get your mortgage from and what type of mortgage you choose, fixed or variable rates (discussed further below). Rates are set by the government in what we call the prime rate, then banks and institutions will determine their rate above that. Think of the prime rate as the anchor on which financial institutions base their rates on for all kinds of loans, including mortgages. To offset inflation, this year the Bank of Canada increased the prime rate six times, from 2.70% in March to 5.95% in October. And each time the banks adjusted their best mortgage rates accordingly.
If you are out shopping for a mortgage your first stop should be a mortgage calculator. This will help you figure out how much money you need to borrow and how much rates will impact your future. There are even calculators that determine your monthly payment including principal, interest, taxes, and insurance, which together make "PITI.” With this tool, you can try out a few options to fine-tune a realistic price range for your dream home.
There are 6 big numbers at play to determine that monthly payment. These are:
So, what are the main factors that influence your mortgage rate?
How much does that house cost and how much do you have saved? According, to the Canadian Real Estate Association the average price of a resale residential home in Ontario in Oct 2022 was $835,090. In today’s market, homebuyers need a minimum of 5% of the price as a down payment if the home costs $500,000 or less, and 10% for anything over $500,000. To avoid mortgage insurance, you’ll need 20% for your down payment.
No matter who you are borrowing from they will want to get a good picture of your overall financial health. Part of that is what they call your Gross Debt Service (GDS) Ratio. The GDS is calculated as the percentage of your monthly income that covers your housing costs. It should not exceed 39%. Lenders will also look at your Total Debt Service (TDS). This is calculated as the percentage of your monthly household income that covers your housing costs plus any additional debt you may have. This number should not exceed 44%.
Your credit score is something you have been building with every bill, and every credit card or loan payment. For years you have been measured on how timely and reliably you pay what you owe. If you’ve been diligent, it’s about to pay off, otherwise, a poor credit score will increase your risk in the eyes of the lender and therefore increase your rate. In 2022, the Canada Mortgage and Housing Corporation lists the minimum credit score requirement on insured mortgages as 680. If your score is below 760, you should try and improve it before applying for a mortgage. Pay down your balances, pay off a loan, and make all your payments on time. An excellent credit score will help qualify you for the best mortgage rates.
Part of the mortgage negotiation includes the type, term, and amortization period. These will all impact your rate.
Type of mortgage: Fixed rate or variable rate, open or closed.
The length of your mortgage can be measured in two ways:
If you’ve chosen an open mortgage, you will have the opportunity to make lump sum payments. Alternatively, many banks offer closed mortgages that include an annual lump sum payment. This payment can be up to 15-20% of your original borrowed amount per year without a penalty. For example, if you have a mortgage of $500,000, you can make a lump sum payment of $75,000-$100,000 per year on top of your other payments. The faster you pay down your mortgage, the shorter the term and the more you save on interest rate charges. Mortgages are compounded twice a year, so doing lump sum or increased payments lowers the principal before compounding saving years off your mortgage.
How you plan to use the property can also affect your rates. If the new house is not your primary residence or if you work from home, many banks will perceive this as an increased risk and therefore increase your interest rates.
Now that you’ve got the lay of the land, let’s get to the real crux and determine how to get the best mortgage rate. Most people start with the bank or credit union they use for their regular banking in the hopes that their customer loyalty will pay off. Often, the rate you are offered is not the best mortgage rate you have on the market. They are counting on you taking the easiest and quickest route and not negotiating or shopping around. This is a mistake and a guarantee you won’t get the most competitive rate.
The lending market is more competitive and flexible than ever and easy to shop. Everyone wants your money. If your preference is to keep all your banking in one place, go back to your bank armed with information and maybe a few offers from other institutions. Depending on your negotiation skills you may get a better deal.
Or look for help from a mortgage broker. They will shop the market for you and can send out applications to multiple institutions or shop for a rate special you are unaware is available!
At the end of the day, the two most crucial factors in getting an excellent rate have been happening for years. How much money have you saved for the down payment AND how good have you been in managing your money to earn an excellent credit score?
With that in mind, the best mortgage rates are determined by shopping, calculating, and comparing offers. For this kind of expertise, with over 35 years of experience, call or email us at Mortgage Architects Bennett Capital Group!