8 Ways to Get a Lower Mortgage RateInterest rates have soared to new heights in 2022 due to the Bank of Canada's actions to curb inflation. According to the July MNP Consumer Debt Index, 59% of
8 Ways to Get a Lower Mortgage Rate
Dated: October 18 2022
8 Ways to Get a Lower Mortgage Rate
Interest rates have soared to new heights in 2022 due to the Bank of Canada's actions to curb inflation. According to the July MNP Consumer Debt Index, 59% of Canadians “already'' feel the effects of interest rate increases.1
The impact has been felt nationwide, partly because of the increasing popularity of variable-rate mortgages. According to Canada Mortgage and Housing Corporation (CMHC), most mortgage borrowers chose variable rate over fixed rate interest in the second half of last year.2
Rising interest rates very quickly impact variable rate mortgages because they are usually tied to the lender’s prime rate. Homeowners with fixed rate mortgages aren’t impacted as quickly because their interest rate is set in place, but they will face higher mortgage rates when the loan is up for renewal. And many people looking for a home are finding it hard to afford or even qualify for a mortgage at today’s increasingly high rates.
Luckily, there are specific steps you can take to strengthen your position when planning to buy a home or renew a current mortgage. Try the below 8 strategies to increase your odds of securing the lowest rate possible.
Borrowers with higher credit scores are considered “less risky” by lenders, which is why they are offered lower interest rates. Your credit is considered “good” if it falls in the 660 to high 800s range.3 If you’re not sure what your credit score is, you can find out on the websites of Canada’s two major credit bureaus, Equifax and Transunion.4
If you have a low credit score, here are some actions you can take to increase it:5
- Request free copies of your credit reports through Equifax and/or Transunion and correct any errors that may be in the report because such errors lower your credit score.
- Make payments to reduce the balances on any revolving credit like credit cards and home equity lines of credit.
- Don’t close old credit card accounts that have good standing because it will shrink your available credit and could also shorten your credit history thereby lowering your score.
- Make future payments on time. Payment history is a huge factor in the determination of your credit score, so please take this seriously.
- Avoid having too many credit applications over a long period of time, to avoid your score from being dinged by multiple inquiries from lenders. If you are rate shopping for a mortgage or car loan, confine all your applications to a 2-week period to minimise the impact.
Implementing the above steps should increase your credit score over time, helping you qualify for a lower mortgage rate.
Avoid making a major career change if you are getting ready to buy a home. Frequent job changes or gaps in your resume negatively affects your ability to borrow money.
After applying for a mortgage, lenders will look at your employment and income history to ensure that you have been financially stable for a minimum of two years.6 If they find that you have a steady paycheque, you can qualify for a better interest rate. That’s because a stable employment history indicates to lenders that you are more likely to repay the loan.
It doesn’t necessarily mean a job change disqualifies you from buying a home. But, something like giving up your corporate employment for freelance work or self-employment can make lenders deny you a mortgage because they want to see proof of a steady income that will likely continue into the future.6
Regardless of how steady your income and how great your credit score are, lenders will want to know if your debt payments are eating up too much of your income. Your debt service ratios are what they use to make this judgement.
Debt service ratios are of two types:7
- Gross Debt Service (GDS) - The percentage of your gross monthly income that covers your home expenses (i.e., mortgage, utilities, property taxes, and 50% of condo maintenance fees).
- Total Debt Service (TDS) - The percentage of your gross monthly income covering ALL debt obligations (i.e., all home expenses, plus student loans, credit cards, and other debts).
What debt service ratios do lenders consider creditworthy? A GDS ratio no higher than 32% and a TDS ratio that is 40% or less are considered good by lenders.7
Low debt service ratios will help you pass the mortgage stress test that is required by all Canadian banks and many other lenders. The stress test is designed to see that you can still afford to make your mortgage payments if/when interest rates increase. You can use this Mortgage Qualifier Tool on the Government of Canada website to estimate how much mortgage you qualify for.
If you cannot pass the mortgage stress test, or your debt service ratios are higher than required, you will have to explore the options of buying a less expensive home, increasing your down payment, or paying down your current debt. An increase in your monthly income if possible will also go a long way.
Minimum down payment requirements depend on the mortgage amount and property type. With a higher down payment, you can qualify for a lower mortgage rate in some cases.
Down payment size is important to your lenders because borrowers that have considerable equity in their homes are less likely to default on their mortgage. If you put down less than 20%, you are considered a higher risk borrower and thus will be required to purchase mortgage default insurance.8
However, some lenders offer discounted rates for borrowers that put down less than 20% because the required mortgage default insurance protects them from any loss. However, the mortgage default insurance premium paid to CMHC or a private insurer will generally be more than any interest savings. You will also have to pay interest on the insurance premium if you add it to the borrowed amount. In a nutshell, you will save a lot of money in borrowing costs if you can make a larger down payment.
Here's the good thing… the following government programs are designed to help eligible first-time home buyers come up with a down payment:9
- Home Buyers’ Plan (HBP) - Buyers can withdraw up to $35,000 (tax-free) from their Registered Retired Savings Plan (RRSP) to build or buy a qualifying home but must pay back the withdrawn amount to the RRSP within 15 years.
- First-Time Home Buyer Incentive - Buyers can have a shared-equity mortgage with the Government of Canada. The Canadian government will pay 5% or 10% of the down payment, interest-free, for a limited equity share of your home and you will have to pay it back when you sell the home, or in 25 years, whichever comes earlier.
We would love to discuss these and other programs, tax rebates, and incentives that may help you come up with a larger down payment. Just call us on (604) 800-2044.
All mortgages are not the same. Depending on your risk tolerance and priorities, some mortgage products can be better for you than others. First of all, there are many interest rate options you can choose from:10
- Fixed - You keep the same interest rate during the entire length of the mortgage term. This option is preferred by most buyers because it assures them stability and predictability. It is worth noting though, that the interest rates are generally higher, and you will continue paying that rate even when market interest rates fall.
- Variable - Your interest rate increases and decreases in tandem with your lender’s prime rate. You can go for an adjustable or fixed monthly payment. But if you go for a fixed payment, the portions of the payment going towards the principal and interest each month will vary with the current rate. Generally, variable-rate mortgages have lower interest rates at the beginning, but they come with the risk of increasing over time.
- Hybrid – Are you on the fence on whether to get a fixed or variable rate? Hybrid mortgages were designed to solve this dilemma. One part of the mortgage will have a fixed rate, while the rest will have a variable rate. So, you get partial protection regardless of whether rates go up or down.
It is worth noting that the difference between fixed and variable rates has recently decreased because of the rising rates.11 But it's still easier to meet the stress-test requirements of the variable rate mortgage because the bar is still lower.12 So, your ability to qualify limits your choices.
A mortgage term is the length of time for which you’re obligated to make mortgage payments. When the term ends, the homeowner will either need to pay off their mortgage or renew for another term.
There are three main types of mortgage terms:13
- Shorter-term - These can be from 6 months to 5 years and are the most popular ones in Canada. Borrowers can decide between a fixed or variable interest rate.
- Longer-term – They are longer than 5 years but typically less than 10 years. Longer-term mortgages usually have fixed interest rates and tough prepayment penalties.
- Convertible – These give you the option to turn a shorter-term mortgage into a longer-term one, usually at a different interest rate.
Which of these mortgage types offer the lowest rates? A shorter-term mortgage will usually have a lower interest rate than a longer-term one. However, depending on the economic climate and whether the mortgage interest rate is fixed, or variable, a 1-year or 3-year rate could be higher than a 5-year rate.
Because 5-year mortgage terms are very popular, lenders generally have very attractive rates for them.14 But to get the best rate, you should compare your options when purchasing your home or renewing your mortgage.
When entering the mortgage market, make sure you request quotes from different lenders to compare their interest rates and fees. Depending on your situation, you could find a lender that offers a better deal for the mortgage type and term that’s ideal for you.
You should start this process before you begin looking for a home. If you get pre-approved for a mortgage, you can secure the mortgage rate for 90 to 120 days in most cases. This is even more important when interest rates are on the rise.15
Some buyers work with a mortgage broker. Like insurance brokers, these people help you do the hard work of gathering quotes to find you the best rate. Since mortgage brokers get paid a commission by the lender, they typically will not cost you anything from your pocket unless your deal is a difficult one to fund. Nonetheless, you should find out which lenders they work with and contact multiple mortgage brokers to compare their recommendations.16
We can be a valuable resource to help you find a lender or mortgage broker especially if you are a first time homebuyer. You can schedule a consultation to discuss your financial needs, and we can get you in touch with lenders or mortgage brokers best suited for your situation. Just call us at (604) 800-2044.
When in the market for mortgages, don’t hesitate to negotiate. In Canada, it's common for lenders to discount the rates that they advertise, which are also called posted rates. You just have to ask in most cases. Of course, this will depend on how strong your mortgage application is, so make sure you implement what you can in strategies 1 to 4 described above.17
It is important to note here, that interest rates are not the only thing on the table. You can also negotiate other contract terms like prepayment options and rebates. If you get a great offer from one lender that you’re not keen on borrowing from, you can ask your preferred lender to either beat that offer or at least match it.
Unfortunately, the extremely low mortgage rates we saw at the peak of the pandemic are behind us. But, today’s 5-year fixed rates still fall below the historical average and are lower compared to the all-time peak of 20.75% in 1981.18
And even though higher mortgage rates have made it less affordable to buy a home, it has also resulted in a more balanced market. As a result, home buyers now have more homes to choose from, get better value for their investment, and sellers are now willing to negotiate.
If you have questions or need more information regarding buying or selling your home, contact us at (604) 800-2044 today to schedule a free consultation. We would love to help you explore your options, navigate the shifting housing market, and make your real estate dreams a reality.
WHAT DO I DO? - I am passionate about helping my clients have a memorable experience when they buy and/or sell their homes. Moving to a new home is one of the most stressful experiences for most peopl....
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