📓10 Tips for Getting the Best Mortgage Rate in Canada 🍁

Seems gone are the days of talking over the fence to your neighbour, heading to the local bank branch or getting parents advice on interest rates.  With the internet opening up research options for borrowers, lenders are having to work even harder to keep their clients.  This advantage stretches from the most inexperienced borrower to borrowers who are on the pulse of the economy. 

With that said there have been so many changes with insured mortgages, uninsured mortgages, fixed rates, Home equity lines of credit, reverse mortgages..... then throw in uninsured but "insurable" how can a buyer truly know what the best rates actually are????

1.Consider all options

When you purchase a home, a down payment is typically applied to the purchase price, and the balance is to be paid off over your term of the mortgage. Purchasing a home and taking on a mortgage is a big commitment. In addition to the amount borrowed, the interest rate you receive is also a factor in assessing affordability. Shopping for the best interest rate could save you tens of thousands of dollars over time. (Just remember this is where we come in as Brokers and make the process simple and stress free!)

There are many different types of mortgages, each of which will impact the interest rate you receive,, each with their own merit depending on your short and long term goals which we will be touching on later.  

The first, and also the best option, is a prime mortgage or "A" lending. These are offered to borrowers who are considered less risky by lenders. These borrowers typically have a credit score of at least 650, have contributed a down payment of between 5 and 20 per cent, and have a low debt-to-income ratio. The most significant perk of a prime mortgage is a lower interest rate, which will help the borrower save thousands of dollars over the loan’s lifetime.

The other is a subprime mortgage, or ( "Alternate / "B" lending). These are offered to borrowers with a lower credit score, typically between 550 and 650. Subprime mortgages carry higher interest rates because borrowers are seen as “riskier.”  While it is not just the score that determines the type of mortgage it is also the overall credit history which will need to be reviewed to give an accurate assessment.  Many times this is just a short term mortgage until the borrower can get their credit back up to "A" lending.  

Alternate lending is not just for weak credit it is also a great option for self employed who do not claim a lot of taxable income.  Talk to a licensed mortgage broker to find out how your credit looks and what type of mortgage will best suit you.

2. Decrease Your Debt-to-Income Ratio

A simple way to get the best mortgage rate in Canada is to decrease your debt-service ratio. This represents the percentage of your gross monthly income used to pay off your debts. Lenders use this value to assess the risk you carry when borrowing money. Canada Mortgage and Housing Corporation recommends keeping your Gross Debt Service (GDS) ratio (your monthly household income that covers your housing costs) below 39 per cent, and your Total Debt Service (TDS) ratio below 44 per cent.

To decrease this ratio, make larger payments on your debts, reduce debt by purchasing only what you can afford in cash, or increase your income. By decreasing your debt-to-income ratio, you signal to lenders that you are less of a risk.

3. Improve Your Credit Score

Improving your credit score takes time, but it can be done. Some easy ways to accomplish this are to make larger payments on your outstanding credit card bills, pay off any collections that may be on your credit report, get caught up on all your bills, and keep outstanding balances on credit cards low.

4. Increase Your Income Stability

Income stability signals to a lender that you’re less likely to default on your mortgage. First, sit down and run an honest assessment on how much money you bring in every month versus how much you spend, to improve your income stability. Then, look for ways to spend less and earn more. This can be accomplished by cutting out frivolous expenses, asking for more hours at work or taking on a side hustle.

5. Gather Your Employment History

Before meeting with a mortgage lender, gathering your employment history is key. Mortgages are large loans, and lenders want to know that you are serious about paying them back and are a low risk for default on your payments. Compiling your employment history shows the lender that you have a track record of gainful employment and are unlikely to be unemployed in the foreseeable future.

6. Save More and Increase Your Down Payment

By contributing a larger down payment, you can reduce the size of your mortgage and attract a more favorable interest rate. Typically, if your down payment is greater than 20 per cent, you will receive a better interest rate than if you put down only five per cent.

7. Use Cash Reserves

Lenders will look at your savings account to ensure you have enough cash in reserve to cover your mortgage in case of job loss. They like to see a few months worth of mortgage payments tucked away in your bank account. This also shows lenders that you are suitable and fiscally responsible. Consider saving up three or four months worth of mortgage payments to get a more favorable mortgage rate.

8. Consider Interest Rates

Currently, interest rates are higher than they've been the past few years. Consider timing the purchase of your home during a time when interests rates are lower, to reduce your monthly payments and the interest paid over the lifetime of your loan. With that said with the market changes there are way more properties on the market to chose from.  Bidding wars and high stress purchases the last couple years aren't a concern! Often the bottom line is you are paying a higher interest rate but a lower purchase price leaving the out of pocket virtually the same.  It's the perfect time to get into the market for less then you would've paid a few months ago!   

9. Low- Versus High-Ratio Mortgages

If you have less than 20 per cent as a down payment on the home you plan to purchase, you’ll need mortgage loan insurance. This serves as an added layer of security for lenders, should you default on your loan. This fee can be paid up-front or added to your monthly payments. To avoid this expense, save up at least 20 per cent for your down payment.

10. Call your Mortgage Broker ☎️

Finally, once you have completed all the steps above to get the best mortgage rate, it is time to call your mortgage broker (that's where we come in).  A mortgage broker is a third-party intermediary between the lender and the borrower. A mortgage broker will collect your financial information and “shop around” for you, to find the best mortgage rate and terms from their pool of lenders. And the best part? A mortgage broker’s services don’t cost the borrower a thing. At the end of the day the best time to get into the market is whenever you can!