Getting the best mortgage interest rates depends on proving to lenders that you’re worth the money you’re asking. Lenders don’t make money if they don’t lend money, but they also don’t want to risk non-repayment, so they’re selective about who they lend to, and how much.
To prove to lenders that you’re worth the risk, you should consider the following:
A large down payment
Cash just seems to be something that many buyers don’t have much of these days. In previous years, it took a 20 per cent down payment to get a mortgage. Today, a 20 per cent down payment is not the standard, with many buyers putting down as little as 5 per cent. However, recent changes to mortgage insurance guidelines could mean such minimal down payments will be even harder to come by.
From a bank’s perspective, a larger down payment indicates more financial strength, and you’ll be rewarded with a lower interest rate. A 20 per cent down payment reduces the need to carry private mortgage insurance until a buyer builds 20 per cent worth of equity in the house.
If you can save a 20 per cent down payment, that’s ideal. Otherwise, put down as much as possible. Generally speaking, the more you can put down, the better rate you will receive and the more receptive you will find lenders.
Get all the information upfront
If you’re dealing with a broker, ask if there are any broker or commitment fees. Make sure the lender or broker does not conduct a credit check until you have decided which institution you’re using. Every time a credit check is performed, it can decrease your credit score. Also, ensure that you are dealing with a large reputable company.
Watch your credit score
You don’t need to have a perfect credit score to get a good mortgage, but you do need a good credit score to get the best possible interest rate. Raising your score is achieved with good personal finance practices: paying your bills on time, not carrying large credit card balances on credit cards for any extended period of time, and building a solid credit history with small personal loans and automotive financing.
The math on this is pretty simple: a lower credit score usually equals a higher interest rate. By following this advice, you’ll qualify for the best mortgage interest rates, saving yourself many thousands of dollars over the life of the loan.
“People spend more time planning their weekend than they do planning their mortgage, which they could be paying for up to 40 years,” says Gary Mauris, President of Dominion Lending Centres. “Buyers should find a good broker who they feel good with and who has the time and patience to explain the intricate differences between each mortgage product and who will explain all the legal terminology and what it means to the buyer.”
He also recommends collecting all the necessary documents, such as income confirmation, employment letter, NOA (notice of assessment) and down payment verification in advance. If your broker has enough time to negotiate on your behalf and is not restricted by tight time lines, you can avoid having to accept a mortgage that’s not necessarily the best available.
Rate isn’t everything
It’s important to get a good mortgage rate, but it is even more important to get a combination of a good rate and a product that suit your needs. Therefore, you must learn the difference between a variable and a fixed rate
, a closed mortgage and an open mortgage, and know the risks involved with each.
If you decide on a
variable mortgage, your rate will fluctuate. If you opt for fixed, then you will be locked into a rate for a pre-determined period of time.
“It’s a lot more than just shopping for the best interest rate,” says Dale Bilton of Mortgage Intelligence, Kitchener, Ont. “It’s about getting a combination of rate and a lender that is a good complement for the immediate needs of the buyer, but also the lender that can work with a change throughout the term of the mortgage.”
Open versus closed
Choosing an open or a closed term is also very important.
The best rate is usually offered on a closed term, but it carries some restrictions such as not being able to prepay your mortgage at any time, since the maturity date is predetermined. An open term, on the other hand, will let you pay off or transfer your mortgage at any time without any prepayment penalty.
Lenders will occasionally offer very low rates on their closed mortgage, but these do not always afford any prepayment privileges.
Some of these restrictions include not being able to transfer your mortgage to a new home if you decide to sell your current one, not being able to increase your payments or take advantage of any annual lump sum prepayment privileges, such as using tax refunds to pay down your mortgage. In such cases, if you want to sell your home or you need to refinance, you could be facing a large financial penalty.
Under some circumstances, experts agree, it’s better to have a mortgage product with a slightly higher interest rate, if it also provides you with some flexibility.
The best advice, then, is to be well aware of all the features of your mortgage agreement, and read everything twice before you sign.
Top 3 tips for rate shopping
mortgage pre-approval, as this will tell you the maximum amount you qualify for. These low rates will be held for 120 days with the guarantee that if rates drop further you will automatically receive the lower rate. And if rates go up, you’re safe, because you are pre-approved for a mortgage at these rates.
Send your mortgage broker your Income confirmation (T1 tax summary, employment letter, recent paystub and confirmation of your down payment, unless your applying for the Zero Down Mortgage)
When making an offer on your home, have your realtor place ‘subject to financing’ in the offer, as this subject allows your mortgage broker to confirm income, down payment, plus CMHC approval or appraisal of the property. These subjects are for five days, which allows you to confirm all the conditions required, together with the property completing the inspection, so you may purchase and live in your home with peace of mind.
Source: Karen Hall, Accredited Mortgage Professional
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