There are a number of factors that influence your mortgage price and below we walk you through all the details that have a significant impact. You may be surprised to learn that the majority of factors are in your control so if you’re looking to become a first-time homebuyer: take notes!
We’ve organized the details into four categories – your credit history, your risk tolerance, your access to cash and finally, the factors beyond your control. Let’s get to it:
1. Your Credit Rating
Your personal credit score has a big impact on your ability to borrow money. This is your official re-payment history with financial lenders, and they take that data very seriously regardless of your income.
It is generally accepted that a score of 680 or more (900 is the highest) demonstrates good credit and opens the door to the best interest rate options for your mortgage. When your credit falls below that standard, you may need to explore alternative lending options or take some time to rebuild your number.
If you have no credit history the lenders consider that to be very risky because they are unable to reference your track record in paying-back loans, even on a basic credit card. This usually leads to a higher interest rate for the borrower.
2. Your Risk Appetite
The decision between a variable or fixed-rate mortgage has always been about risk tolerance.
Variable rates are lower, but they could rise at any time. A variable-rate borrower may have to manage higher payments if interest rates go up over time. Fixed-rate mortgages offer more stability with set payment amounts but also come with a risk that you could be missing out on better rates (aka FOMO). For example – you are locked-in for a five-year term while bank rates drop, and mortgages become more affordable over that time. This is the case for a number of Canadians today who are locked in at significantly higher rates – up to double – than what is currently offered.
The majority of Canadians prefer the FOMO risks associated with fixed-rate mortgages – the benefit of being able to financially plan around a consistent payment value appears to far outweigh the benefit of potentially saving more.
Almost 75% of Canadian mortgages are fixed-rate.
(Canadian Mortgage Trends, 2019)
3. Your Personal Cash Flow Considerations
Here is where the details of your re-payment plan consider how much money you have access to today, and for how long. This is where your income, your assets, and your debt come together on paper – to show how much cash you can put down on your mortgage over time. These impacts are threefold and basically ask the questions: Is your mortgage insurable? How big is your mortgage relative to property value? And how long are you borrowing for?
Property Asset & Down Payment
The value of the property and the amount of money you can put down at the start of the process impacts your mortgage rate in two ways. The first relates to insurance and the second relates to the relative size of your mortgage compared to the property value.
Insured / Insurable / Uninsurable
An insurable property has three constant characteristics:
- Down payment of 20% or more
- Amortization period of 25 years or less
- Property value of $1M or less
When combined, these create the standard qualities of the typical mortgage request. This “insurable” mortgage type does not actually require insurance but would technically qualify for it if need be. One can expect standard rates for these mortgage types.
When a property is purchased with less than 20% down, the lender requires the borrower to pay for mortgage default insurance should you be unable to service your mortgage. This payment actually reduces the lender’s risk completely and opens the door to even better rates than “insurable” mortgages, although the mortgage insurance payment cost usually balances that benefit out. Any property that holds a 30-year amortization period or a price tag of $1 million or more is considered to be uninsurable. These mortgages usually have the highest rates on the market.
Loan to Value Ratio
This equation compares the size of your mortgage to the value of the property that you are purchasing. To help break this down, if your home is valued at $500,000 and your mortgage is $400,000, your loan-to-value ratio would be 80% (400,000/500,000). It is generally understood that a loan-to-value ratio of 65% or lower will qualify for the best rates. When you combine this ability with insurable mortgage characteristics the result is generally preferred rates for the borrower, but this result is difficult for most to obtain, especially for first-time buyers.
Term Length
Usually the longer the term, the higher the rate. The time factor between a 3-year and 10-year term must consider the increased risk of life-events that could come in the way of your cash flow. The bank is also hedging their bets about what interest rates will be doing over the course of that time.
How long are you borrowing for?
Longer terms come with higher rates.
4. Other Factors Beyond your Control
The following two factors inherently influence the price of your mortgage and there is very little that buyers can do to counter their impact.
Transaction Type
As our previous blog reported – refinancing a mortgage can be a very expensive endeavour, especially if you have a significant amount of time left on a fixed-rate product. This transaction type notoriously comes with a higher interest rate for buyers.
Renewing a mortgage does not usually impact the offered rate significantly. Lenders know that it is cumbersome to switch institutions and they are “banking” on your inclination to stick with them as long as the rate offered is competitive in the current market.
Purchasing a mortgage creates an opportunity for better rates in that lenders are bidding for the ability to service your debt needs over time, with the hope that you will be a loyal customer and maybe bring more business to their institution. This is an unusual opportunity for first time buyers to negotiate from a long-term relationship perspective.
Property Type
Investment properties, or second vacation properties usually carry additional risk for lenders. The most obvious reason for this is because the borrower is substantially increasing their financial commitments and must prove they can satisfy both loans simultaneously over the terms. Should times ahead become financially difficult for the borrower – it is understandable that they would sacrifice the “other” property in order to ensure their primary residence, this fact makes the second mortgage riskier in the lender’s eyes.
Considering an investment property?
Prepare for higher rates.
The Best Rates with a Professional
Ultimately, the best way to secure competitive rates in today’s market is to use a professional mortgage broker. While these factors above hold significant weight in the process, there are other considerations that are worth exploring and the details can be overwhelming. Our advice to anyone looking to purchase, renew or refinance a mortgage is to engage a professional who has your best interest at hand. Someone who cares about your financial health and wants you to succeed – and not just in the housing market!
