What Factors Should I Consider When Comparing Mortgages Rates In Canada?
When buying a home and shopping for the best mortgage rate in Canada, it is easy to become hyper focused on the lowest rate available and miss other factors that might have a big impact on your mortgage rate and type decision. Although it’s true that the mortgage rate will be a big determining factor for many people, there are other factors that can be equally or more important for your circumstances. One such example is choosing to end your mortgage before the term is up, potentially leaving you on the hook for thousands of dollars. In this case you might opt for an open mortgage instead of closed mortgage, even though the interest rate is higher.
What is the difference between an open and closed mortgage?
You may have noticed mortgages rates referencing open and closed term rate types. Simply put an open mortgage gives you the option to pay off the entire mortgage amount at any time during the term without incurring penalties. A closed mortgage limits your ability to pay off the entire mortgage amount before the mortgage term is over. Some closed mortgage terms will still offer annual lump sum or accelerated payment options, but these are limited to small amounts of the total mortgage amount. Generally, closed mortgages will offer the best mortgage rate and open mortgages will charge a higher rate for the flexibility option. The mortgage rate type you choose will depend on your individual circumstances, but you can also choose different term lengths varying from 1 year to 10 year terms.
What is the difference between a fixed rate and variable rate mortgage?
When choosing the best mortgage rate you will see options for fixed rate or variable rate mortgages with different interest rate amounts. Fixed rate mortgages provide an interest rate that remains fixed at the same rate for the term of the mortgage. As an example if you signed up for a 5 year fixed rate mortgage and the interest rate is 3.29%, then this will be the interest rate you pay for the 5 years or until the term is up. Variable rate mortgages are slightly more complex as the rate will adjust up or down based on the prime rate +/- a predetermined amount. For example a variable rate mortgage may be advertised as prime 3.55% minus 0.50%, resulting in a mortgage rate of 3.05%. However, in this same example if the prime rate increased from 3.55% to 3.80%, your new mortgage rate would change to 3.30%. The payment amounts in variable rate mortgages will usually remain constant, but the amount paid towards interest or principle will change with the prime rate adjustments. Historically over the last decade, variable rate mortgages have been a better bet than fixed rate mortgages. As interest rates increase, the predictability of a fixed rate mortgage can be more attractive to some.
What is the mortgage term?
The mortgage term refers to the period of time you are contracted with a particular lender for the rate and conditions of the mortgage. This is not to be confused with the amortization period, which is the total time it will take for you to pay off the entire mortgage amount. The monthly payment amount of the mortgage will be impacted by the amortization schedule, but it is not the same as the mortgage term. As an example if you sign up for a 5 year fixed mortgage with a rate of 3.29% amortized over 25 years, after the 5 year term you will need to renew your mortgage with a new or existing lender with new rates and terms. Upon renewal, your remaining amortization schedule would be 20 years in the previous example (less the 5 years you already completed).
What does rate hold mean?
The rate hold refers to the period of time a lender will provide you the same rate or hold your rate when you apply for a mortgage. This usually ranges anywhere from 30 to 120 days or more depending on individual lenders. Whether rates rise or fall during the rate hold period you will receive the best rate.
What is a CMHC insured mortgage?
CMHC stands for Canada Mortgage and Housing Corporation. In Canada, CMHC plays an important role insuring mortgages for lenders against mortgage default and also providing accessible mortgages to first time home buyers with lower down payment amounts. Lenders are required to insure mortgages that have down payments of less than 20%. There are two other insurers known as Genworth Financial and Canada Guaranty in addition to CMHC. Lenders will generally pass down the insurance premiums to borrowers, representing an added cost to you. The premiums can range anywhere from 2.8% - 4.5% depending on your down payment amount. As a general rule, a down payment of greater than 20% will avoid these premiums.
What information do I need to provide to apply for a mortgage?
You can utilize the services of a mortgage broker or representative at a financial institution to help guide you through the process of applying for a mortgage. Generally, you can expect lenders to ask for some or all of the following:
- credit score
- employment history
- income and expense details
- information about your assets and debts
- Notice of Assessment
- insurance documents
- purchase and sale documents
This list is not exhaustive and each lender may have their own requirements for assessing your mortgage application. This is another reason why it is best to use a mortgage broker to help guide you through the process and find you the best mortgage for your needs.
Other factors to consider when choosing the best mortgage rate
Some other considerations when choosing your mortgage include:
- Prepayment options
- First Time Buyer Incentives
- Related Costs