Decoding Mortgage Rates: Why does it seem like they are all over the place?
One of the first things clients often ask about is rate. Why? Because obviously rate is important and you want to ensure that you are getting the best deal possible for you, but it is crucial to keep in mind that not all rates are created equal.
• My neighbour got a mortgage a couple months ago and his rate is way better than mine – why?
A lot can happen within the mortgage market in a few months’ time. In fact, mortgage rates can (and sometimes do) fluctuate day by day and it’s not because lenders are deliberately trying to confuse the consumer. Fixed and variable mortgage rates are influenced by things like the bond market, Bank of Canada prime rate, funding costs and market competition so depending on what’s happening with the economy you’ll see these rates jump around. There are also seasonal factors (i.e. you’re likely to see a lot of ‘special’ offers in the Spring when the real estate market tends to be at its most active), and not to mention the creditworthiness of the individual borrower. No two borrowers are the same and depending on different factors (such as credit score) rates will fluctuate.
Another thing to keep in mind is the rate hold period – if your neighbour bought his house two months ago, but got pre-approved four months before that, then he’s quoting you a rate that’s six months old. That’s why it’s important to get a rate guarantee in place as soon as possible in order to protect yourself from a potential increase.
• The rate I’ve been quoted seems to be a lot higher than ones I see when I do a Google search.
Beware the pitfalls of Google rate shopping, because the search engine doesn’t tell the whole story. One of the biggest influencing factors with the different rates that come up are whether a mortgage is insured, insurable or conventional. Still with me? I’ll keep it short; I promise. If a mortgage is insured or insurable it lowers the lenders risk of loss (and doesn’t tie up their capital) so the rates are generally lower. Insured is where you have less than 20% down and you pay a premium to essentially protect the lender from the risk of your mortgage going bad. To be insurable a mortgage might not be insured but it must meet the Insurer’s requirements (i.e. debt servicing, property price under a million, maximum of 25 years amortization and more). So short answer, if you’re looking for a 30 year amortization to keep the payment low, or you want a home equity credit line with the mortgage, or the property you’re buying comes in at over a million then the mortgage you’re looking for isn’t generally eligible for those deeply discounted rates you searched up on Google.
Another factor is access to different mortgage programs. If your self-employed with little declared income, or perhaps you’re purchasing your sixth rental property or if you’re in the process of rebuilding your bruised credit – in all of the above cases your Broker may be qualifying you using one of the many specialty programs that are available. The above are just a few examples of some of the options that are out there, but each of these specialty or “niche” programs are priced differently to reflect their risk to the lender.
Lastly, a rate that you search on the internet only tells you the number – what it doesn’t tell you is what kind of restrictions might be behind it. Yes, it sounds like a great rate, but does it allow you to make lump sum payments? What kind of penalty calculation does the lender use? What happens if you want to switch to another lender or sell your home and move? That’s why rate isn’t always the be-all-end-all because if you chase rate while ignoring features, you could end up paying way more in the long run.
• If I take that 3.20% rate verses the 3.15% rate the next guy is offering, I’ll end up paying WAY more in interest.
The reality is? Probably not. While “way more” is a subjective concept, the actual difference in interest between two rates may not be as significant as you think. With the example of the two rates above, on a $300,000 mortgage with a 5 Year Term the difference in cost is less than $700 in total (or roughly $140/year). If the higher rate provides some additional value (i.e. preferable repayment options, extended amortization or a line of credit option) then it may very well make sense to pay the extra $8/month for the added flexibility. And if the lender is offering incentives like cash back or coverage of fees (legal fees alone can run in the $1000-$1500 range) then it may net out to be the same thing.
Again, no two applications are ever identical so comparing your rate to your neighbour’s rate is not an “apples to apples” exercise. It’s always better to have an in-depth conversation with your Broker to ensure that you are getting the right features to fit your personal circumstances.
Questions? Let’s talk