A regular chore for mortgage broker Victor Tran is providing reality checks to people who find great rate deals advertised online.
“It happens all the time,” Mr. Tran said. “I would say almost nine out of 10 of my conversations.”
Canada’s high-cost housing market forces buyers and owners to find the best possible mortgage rate. Search Google and websites from lenders, mortgage brokers and financial data aggregators will present you with rates that look great in comparison to what banks typically offer.
But those great rates are available only to specific borrowers, not to everyone. Mr. Tran’s take on how people receive this news: “Disappointment, pretty much all the time.”
Avoid mortgage rate letdown by understanding how discounts are handed out by lenders. We’ll dig into this with an example based on variable-rate mortgages, which are priced off the prime rate at mortgage lenders. The prime is in turn guided by the Bank of Canada’s overnight rate.
Mr. Tran said the discount on variable-rate mortgages recently ranged from zero to 1.05 percentage points off the prime rate, currently 5.95 per cent. Where you find yourself in this spectrum of discounting depends on several factors, but none are more important than whether your mortgage is insured against default.
How mortgage insurance works: borrowers pay for coverage that benefits the lender if they can’t pay what they owe and default. Lenders see insured mortgages as lower risk and thus deserving of top discounts.
Late last week, the websites of three national mortgage brokerage companies displayed variable rates of 4.85, 5 and 5.05 per cent. These rates are shown in bold, with harder to spot fine print explaining they apply to insured mortgages, also called high-ratio mortgages.
Mr. Tran said the comparable rate on uninsured mortgages, where the borrower puts 20 per cent or more down, would be in the area of 5.45 per cent after a discount off prime of 0.5 per cent. Some other factors that help determine the mortgage rate offered by a lender:
- Amortization period: Uninsured mortgages can be paid off over 30 years and, starting Dec. 15, insured borrowers will have the same option to go up from the current standard of 25 years; regardless of whether you’re insured or not, slightly better discounts go to 25-year amortizations versus 30 years.
- Credit score: Mr. Tran said better discounts go to borrowers with a score of 680 and higher; lenders may also reward borrowers who don’t have other outstanding debts.
- Closing date: Lenders particularly like a 30-day close and may reward it with a better discount than, say 60 or 90 days.
- Loan-to-value ratio: Down payments of 35 per cent and up may be rewarded in rate discounting.
One more wrinkle in mortgage discounting concerns what are known as “insurable mortgages.” This category applies to mortgages where the borrower puts 20 per cent or more down and the lender takes steps to get the mortgage insured to reduce risk. Mr. Tran said insurable mortgages also need to be for less than a $1-million purchase price and have an amortization of 25 years or less.
Insurable mortgages are worth noting because they can bring discounts somewhere in between uninsured and insured. Borrowers don’t have a direct role in deciding whether a mortgage with a down payment of 20 per cent or more is insurable – it’s up to the lender to make this call and pay the cost. Still, borrowers who think they may qualify can ask their lender about insurable mortgages.
Getting a great rate on a mortgage can be the deciding factor in whether you can afford to buy and own a home, but don’t choose a lender on rates alone. Two other factors to consider are options for making prepayments each year against the principal and the cost of breaking a mortgage early, something that happens more often than you think.
A big mortgage decision right now is to grab a fixed-rate mortgage with a three- to five-year term, or go variable. Mr. Tran said most of his clients choose fixed rates right now because they’re cheaper than variable and offer stable payments.
A thought on variable versus fixed: variable rates could fall below today’s fixed rates some time next year. One thing we know in today’s economic uncertainty is that the Bank of Canada isn’t finished cutting rates.
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