How to get the lowest possible interest rate on your mortgage.

In the wake of the global financial crisis, Canada’s government has slashed interest rates to historical lows in an effort to stimulate the local economy and keep Canadians borrowing. This has created nearly ideal conditions for homeowners and new homebuyers to secure excellent rates on their mortgages.

Currently, the Bank of Canada has set its prime rate at .25 percent, or a quarter of a basis point, and says it will keep it there (barring unforeseen complications with inflation) through to next year. This puts the bank prime rate at 2.25 per cent, the lowest ever seen.

While the days of offering mortgage rates below prime are clearly over, banks are still offering some extremely good deals on variable and short-term rates. So what do you need to know to get the very best rate out there?

Shop Around

Not enough Canadians are shopping around, according to a recent survey by the Canada Mortgage and Housing Corporation: more than three-quarters of mortgage clients stay with their existing lender, and nearly half of new buyers will go with their existing financial institution. While many will cite loyalty and a ‘good relationship’ with their bank or financial institution, they are denying themselves the opportunity to shop around for a better deal.

Small differences, big savings
Rates can vary a fair bit from institution to institution, and a difference of even half a percent can mean a lot of savings in the long run. For example, let’s look at a $250,000 mortgage amortized over 25 years. An average rate of 5.5% (for simplicity’s sake, let’s assume the rate is the same throughout) will have generated about $208,000 in interest by the time the mortgage is paid off: the cost of borrowing the money. The same mortgage at 5% will generate just $186,000 in interest ⎯ a savings of nearly $22,000.

Competing for your business

Broker vs Bank

When shopping around, there are a number of places you can take your mortgage business. There are many kinds of financial institutions that offer mortgages, not just banks. Because understanding all the options and their variables can get fairly complex, you may choose to go to a mortgage broker to help you compare rates and terms and find the deal that is right for you.

A mortgage broker is essentially a mortgage specialist, who can help you negotiate with a wide variety of mortgage lenders. This is quite different from the personal banker, who will only deal with their own bank for the mortgage, offering far few options and less flexibility.

Brokers popular with new buyers
In fact, more and more first-time homebuyers are choosing to go with mortgage brokers; the CMHC’s 2009 Mortgage Consumer Survey found that 44% of new mortgages last year were mediated by a mortgage broker, up from 35% in 2007.

Some clients still prefer to stay with their banks, feeling they will be able to call on their personal banker for attentive service long after the deal is negotiated. Indeed, a mortgage broker is involved only at the outset; once the mortgage loan agreement is signed, a client deals directly with the lender. However, the CMHC survey showed that client satisfaction was the same whether dealing with a bank or a mortgage broker.

Nothing but mortgages
One reason brokers are slowly gaining the upper hand is the very fact of their specialization: they deal in nothing but mortgages, and high volumes at that. Lenders who receive tens of millions of dollars in business annually from a broker are more likely to offer favourable rates to keep that business.

Fixed vs Variables Rates

With interest rates exceedingly low, the big question is now whether to choose a fixed or variable rate on your mortgage.
Variable (or floating) rate mortgages fluctuate with the prime rate: as the prime rate goes up and down, so too does your interest rate and monthly payment. Fixed mortgage rates are exactly what they sound like — regardless of what happens to the prime rate, your interest rate (and payment) remain fixed for the term.

Riding the rollercoaster
Variable rates offer clear short-term benefits right now. The Bank of Canada has offered assurances that the prime rate will stay where it is for some time to come, meaning rates will stay low for the foreseeable future.

For those who negotiated a good deal on a variable rate before rates crashed, this is a sweetheart of a deal: when interest rates where higher, some banks were offering variable rates at or even below bank prime. This has some people paying as little as 1.35% interest on their mortgages, a scenario not likely to come around again for a long, long time.

Take advantage of the lows
Some advisors see this as a golden opportunity to take advantage of a one-time windfall, and say that those who opt for or already have variable rate deals should rest easy for the next year, and take advantage by making additional payments to their mortgage to reduce their principal.

Prudence is fixed
However, the risk exists that rates will go up, and fast, and there are many who would prefer to lock in on the historically low fixed rates offered right now, even though it means paying more in the short term.
Choosing which way to go is up to you: some people are averse to risk, and prefer to know exactly what their payments will be. And while rates are low now, they will eventually rise, and today’s deals on fixed rates will be off the table. For the conservative client, locking in a fixed rate is the more prudent choice.

No cap on rates
Keep in mind that there is no limit on how high interest rates can go; in the 1980s, mortgage rates rose above 20%. While government policy is used to try to manage rates at reasonable levels, market forces are what dictate where they eventually end up.

Diversify your options
There is a third option, which involves taking a combination of variable and fixed rates on your mortgage. Also known as blended or hybrid mortgage, combination mortgages are growing in popularity, because they allow you to diversify, a principle often used in stock portfolios (mutual funds are a perfect example of minimizing risk through diversification) and according to some advisors, all too lacking in mortgage management.

Not every lender will offer a combination mortgage product, so be sure to shop around, or let your mortgage broker know you are interested in this option.

Short Term vs Long Term

One more factor to consider is that rates offered, whether fixed or variable, will change depending on the term you choose. The term is not the same as the amortization; mortgages typically will be paid off over 15 to 25 years (the amortization) but a mortgage term will typically run for anywhere from six months to five years. (There are longer terms available, but the rates tend to be prohibitive, as banks are no more willing to predict the long-term than the rest of us).
At the end of the term, you will have to renegotiate a deal with your lender, based on the rates offered at that time.

Looking ahead
Because the prime rate is so low, banks right now are generally offering better deals for shorter terms, and slightly higher rates for longer terms. This doesn’t mean that the longer term is not still the better option; if you choose a one-year term now and interest rates go up significantly, you will be forced to choose from much higher rates when you renegotiate in a year’s time.

Calculated risks
There are mortgage calculators available online that will let you run different scenarios with the various rates available, but it’s best to let a specialist draw up a few potential packages for you based on your particular situation. They can help you decide how much risk you are willing to take, and what would best work out to your advantage.

Cleaning Up Your Credit Score

There is one more thing you can do to get the very best rate out there, and that is to improve your credit score. Your credit score is basically a report card on how good a borrower you are, and the better your score, the more likely your lender is to offer you a great deal on your mortgage.

It can also affect what kind of mortgage the lender is willing to offer you; non-conventional mortgages are usually not offered to those with low credit scores, as it is seen as too much as a risk for the lender. The lower the score, the bigger the down payment lenders will expect on the mortgage.

Building a perfect score
A perfect score on the Beacon scale is 900, and most Canadians will average about 700. A score of 700 or more will usually secure you the best rates.

Getting started
In order to establish a credit score, you need to start by borrowing money; the most common way is to obtain a credit card with a low limit or a security deposit. The more you use the card and pay it off on time, the more your score improves.

Pay on time
Making loan payments on time (including cell phone bills!) is one of the most important factors in your credit score. Late payments of more than 30 days will show up on your record and aversely affect your score, so be sure to keep on top of at least the minimum payments due.

Pay in full
Paying off your credit card, bank overdraft and line of credit balances in full each month is an excellent way to get a healthy credit score. By using a credit card only to make your regular household purchases, you can avoid overspending, and make sure you have the budget to pay it off at the end of the month.

Minimize your debt
Another important factor is to keep your overall debt low. The more you borrow, the more you are seen as a risk by lenders, since you will already be carrying a heavy debt load. Try to keep credit card and line of credit balances at no more than 30% of the total limit, and close out any credit accounts that you don’t need or use.

Don’t be a credit seeker
Be careful about making too many applications for credit. For example, when you are shopping around for a mortgage, each lender will request a record of your credit history. These requests all show up on your history. If they are all clustered together in a short period, it’s usually not a red flag for lenders, but if you continually have credit checks showing up on your history lenders will be wary.

A mortgage broker offers a slight advantage in this case, as they will perform just one credit check, and then use it to shop around with various lenders on your behalf, rather than having multiple requests to your credit history.

For additional information on how to get an instant approval for the lowest mortgage rate in Canada please contact on of our Mortgage Specialists today @ 1-866-686-9929 or info@propertysold.ca.