Is Rate the Most Important?
Mortgage clients frequently tell me, “I need the best mortgage rate; what rate do you offer?”
Rates today are not that simple, period. If you ask me, what’s your best mortgage rate? My response will be, I don’t know, what’s your credit score? How much is your down payment? How are your ratios? Are you employed, self-employed or retired? Today, without a full application, confirmation of income, and credit bureau, I really can’t tell what the best rate is for you. More importantly, I want to know what your outcome is? Are you looking to maintain a lifestyle, or is paying off the mortgage the priority?
If the priority is to pay the mortgage quickly, and I put you with a lender and mortgage product with a super low rate, but, in the fine print, you’re not able to make prepayments, you won’t meet your goal or expectations.
What if there are financial hiccups, and you need to access the equity in the home, but the contract says you have to sell the house to get out of the contract. Does this ultra-low rate serve you? Don’t get me wrong, rates are important, but a fair contract and strategy are essential.
Today, the lowest rates are frequently accompanied by an extra penalty in the fine print and restrictive terms.
First, some facts:
- The average mortgage in Canada lasts for just over three years.
- Over 50% of mortgages in Canada are locked in for five years or longer.
- Less than 50% of mortgages make it to renewal.
- The difference between a great contract or an ok contact is typically less than 0.25%
- Did you know that 0.25% is equal to $12.10 on $100,000.00? That means the difference of 0.25% on a $300,000.00 mortgage is only $36.30 a month.
This means most people will pay a penalty for terminating their mortgage before renewal. You might think it doesn’t matter? But it does; life happens; who saw a pandemic shaking things up?
Penalties are calculated differently from lender to lender; I can tell you that the big six have sizable penalties that are calculated on IRD (interest rate differential) from the posted rate. I typically prefer monoline lenders as they have lower penalties, more generous prepayment options, and terms, and they get their funds from the big six.
I once paid out a mortgage for a client with Big Blue for $36,000.00 as the family was in financial trouble, true story. Penalties hurt.
Here’s the thing, all contracts in Canada come with a penalty; my job is to help mitigate how much you need to pay should you terminate a mortgage contract before the end of the term.
Back to rates, You have excellent credit. You’ve saved a down payment of over 20%, and you are expecting a well deserved low rate, sorry, uninsured mortgages, meaning mortgages that do not have default insurance or CMHC will receive a higher rate; they are considered a higher risk.
A mortgage that is default insured by CMHC is considered less risky. Therefore they receive better rates.
Planning is always advantageous when done upfront. We’ll discuss your financial lifestyle, mortgage goals, payment structures, fixed vs. variable, and create a plan that fits you; five years is a long time.
You’re not entirely convinced and still want the “best” rate? Let’s take a look at the numbers and then decide.
Often different lenders vary in rates by as much as a .25% or greater.
Did you know, a mortgage amount of $250,000.00 amortized over 25 years with an interest rate difference of 0.25% would equate to a difference of $30.00 a month or $1800.00 over a five-year term. When you see the math, the interest rate doesn’t seem like a critical factor when committing to a mortgage. Be seduced by a good contract, not a rate.
When looking for a mortgage, look at the whole picture. What will the next five years have in store for you? Better job, inheritance, marriage, matt leave, a large bonus? What’s your outcome? Are you trying to pay the mortgage as quickly as possible? Or, are you looking to maintain a lifestyle? We need to match your mortgage to your outcome, not to a rate.
Think about this next time you’re mortgage shopping
I am here to help should you have any questions about your mortgage options.
As always, I am here to support you.