4 top tips for landing the best mortgage rates

Laveta Brigham 3 years ago

If you’re caught up in the thrill of buying a home, it’s easy not to think too hard about your mortgage rate. Does a 1% difference even mater? You might be surprised. Let’s say you bought a home for $499,000, put 20% ($99,800) down and snagged a five-year, fixed-rate mortgage […]

If you’re caught up in the thrill of buying a home, it’s easy not to think too hard about your mortgage rate. Does a 1% difference even mater?

You might be surprised.

Let’s say you bought a home for $499,000, put 20% ($99,800) down and snagged a five-year, fixed-rate mortgage at 2.80% APR. A mortgage calculator will show that you’ll be paying $194,176 in interest over the life of the loan.

But if you settled instead for a loan at 3.80% APR, you’ll be looking at interest charges totalling $272,306 — $78,130 more.

Don’t get trapped with an unfavourable loan. Here are four tips for getting the best possible mortgage.

1. Look your best as a borrower



a close up of a man wearing a suit and tie: katalinks / Shutterstock Spiff up your credit before you borrow.

© Provided by MoneyWise Canada
katalinks / Shutterstock Spiff up your credit before you borrow.

You’ll score a low rate if you can convince a lender that you’re low risk.

So, check your credit score and take steps to raise it, such as paying down your debts to give yourself a lower debt-to-income ratio.

A mortgage lender wants to know it will be repaid. If you can make the lender feel comfortable, with a credit score above 700 or 750, you will get a sweeter deal.

2. Look your best as an earner



a woman holding a sign: Andrey_Popov / Shutterstock You'll look better to a lender if you're an employee, not an entrepreneur.

© Provided by MoneyWise Canada
Andrey_Popov / Shutterstock You’ll look better to a lender if you’re an employee, not an entrepreneur.

Gallery: Want to refinance into a record-low mortgage rate? Do these 6 things (MoneyWise Canada)

Want to refinance into a record-low mortgage rate? Do these 6 things

With Canadian mortgage rates at outrageous lows, it’s easy for homeowners to save money by refinancing. Saving a lot of money takes a bit more effort.

Industry experts say anyone paying more than 3% on a fixed-rate mortgage — or 0.75% more than current rates — should try to strike a better deal. The savings, often hundreds of dollars a month, can help you endure the financial fallout from the COVID-19 pandemic and pad your wallet for the future.

But when dealing with large sums of money, even small decisions can have a huge impact. Here are six tips to maximize your savings when refinancing:


1. Look your best as a borrower

Whether you’re refinancing with a new or existing lender, you need to prove your reliability as a borrower all over again. And Jessi Johnson, a Vancouver-based mortgage broker and realtor, says lenders are being skittish while the COVID-19 economy remains uncertain.

You’ll need a minimum credit score of 600 to qualify for refinancing, Johnson says — 650 if you want the best advertised deal. Check your credit score for free online and take steps to improve it if you can.

Homeowners will also need to provide proof of regular employment and income, which will be challenging for many amid all the layoffs and shutdowns. Some lenders are even double-checking employment status just before closing to ensure you’re still on the payroll. If your employment status is rocky right now, gather whatever evidence you can to show you’re pulling a steady income.

While it’s a bit trickier to reassure lenders these days, you don’t have to worry about those harsh new rules from the Canadian Mortgage and Housing Corporation. Those only apply to new high-ratio mortgages, not refinancing.


2. Read the fine print

Before you fixate on some crazy-low rate you’ve seen in the news, do a quick reality check. Not everyone can get a rate like that — and you might not want to.

Some advertised rates only apply to high-ratio borrowers who are paying extra for mortgage default insurance. Some might require a commitment to a term length that doesn’t work for you.

Plus, no-frills mortgages can come with restrictions. Your new agreement might lack prepayment privileges, portability or be prohibitively expensive to break early.

So don’t assume your new mortgage will work just like your old one. Pay attention to the details while you’re hunting for a low rate and think about what features matter to you.

If combing through fine print stresses you out, there are free services including Loans Canada that will compare rates from Canada’s top lenders and find you the best loan available based on your unique needs.


3. Calculate your closing costs

The whole point of refinancing is to save you money, so make sure you actually come out ahead after covering the cost of the transaction.

First off, there’s a mortgage registration fee of approximately $70 and legal fees that run between $700 to $1,000.

And if you’re switching lenders, expect to be hit with an extra discharge free. Prices range between $0 and $400, depending on your province and lender. Luckily, if your mortgage is big enough, your new lender may consider paying your legal fees for you.

But the biggest cost of refinancing comes from breaking a mortgage before the end of your term. Budget for a penalty equal to three months of interest for a variable mortgage or up to 4% of a fixed-rate mortgage. Depending on how much you’re borrowing and how much time you have left in your term, that penalty can be thousands of dollars.

Once you’ve tallied up the one-time cost of switching, use an online mortgage calculator to see whether a lower interest rate will save you more in interest over the course of your term.


4. Get ready to act fast

The COVID-era economy is unstable; as a result, today’s amazing offers may not last for long. The quicker you get all your information in order, the quicker you can lock in your rate.

Here’s a document to-do list, so you’ll be prepared when your lender asks:

  • Look up your credit score.
  • Keep the most recent mortgage statement from your current lender handy.
  • Gather pay stubs, bank statements and a letter of employment to prove you’re on the payroll.
  • Round-up tax returns and notices of assessment from the last two years as proof of income.
  • Get an informed estimate of your home’s current value.
  • Provide proof that your property tax payments are up to date.


5. Protect your family from debt

A new mortgage is a good opportunity to remember the risk that thousands of dollars in debt can pose.

While it isn’t pleasant to think about, homeowners need to consider the possibility that something unexpected might happen to them. You want to ensure your family won’t have to panic about mortgage payments in the unlikely event of your death.

The best way to make sure your family will be financially secure is to take out a life insurance policy.

Some companies are hiking their premiums during the pandemic, but a good online comparison site will be able to find you an affordable rate. The amount you save by refinancing will likely be able to pay for a policy all on its own.


6. Prepare to break up with your lender

Loyalty is all fine and good, but the statistics say it’s better not to be married to your lender.

Companies know you don’t want to go through the trouble of shopping around — and they’re taking advantage. A Canadian government agency, the Office of the Superintendent of Financial Institutions, reported in January that lenders offer their returning clients rates that are 0.09% higher, on average, than rates available elsewhere.

Even that difference — applied to a $400,000 mortgage with a 20-year amortization at 2.25% versus 2.34% — would save you $1,651 in interest over five years. But that’s just the average.

As with anything, it pays to shop around. To save time, you can use Loans Canada to find the best rate for your specific financial situation.



7/7 SLIDES

It’s best not to apply for a mortgage until you’ve had the same employer for two years or more.

Know that lenders favour borrowers who are employed by businesses, versus the self-employed and freelancers.

If you work for yourself but your spouse works for a company, you might get a much better mortgage rate if the loan is taken out only in your spouse’s name.

3. Put more money down



a piece of paper: m-agention / Shutterstock Low-down-payment options are available, but they won't get you the best rate.

© Provided by MoneyWise Canada
m-agention / Shutterstock Low-down-payment options are available, but they won’t get you the best rate.

Sure, there are mortgages that require just a small down payment, sometimes as low as 5% for properties worth $500,000 or less.

But if you put down at least 20% of the cost of the home, you can land a lower interest rate.

If your down payment is less than 20%, your interest rate may be higher and you will be required to pay for mortgage default insurance (also known as CMHC insurance), increasing your total cost.

4. Weigh your options



a woman sitting in front of a laptop: Dean Drobot / Shutterstock Comparison-shop and look at other loan types if you want to be sure you're getting the lowest possible rate.

© Provided by MoneyWise Canada
Dean Drobot / Shutterstock Comparison-shop and look at other loan types if you want to be sure you’re getting the lowest possible rate.

Shop, shop, shop around and compare rates. Don’t just grab a loan from the very first company you talk to. Just make sure you don’t make more than one application, since each application counts as a hard pull on your credit score.

That’s why it can sometimes pay off to speak to a mortgage broker or use an online broker. Mortgage brokers are able to browse multiple rates from multiple lenders, helping you get the best deal, and your credit history only gets pulled once.

Be aware that interest rates vary across loan types. Variable-rate mortgages have lower rates than fixed-rate loans, and shorter-term mortgages beat 10-year loans.

Your mortgage interest rate is a choice that could be with you for years. Make a wise decision for maximum savings over that time.

Or better yet, get the online brokerage Homewise to work the market for you. Homewise will negotiate on your behalf with more than 30 big banks and other lenders, completely free, and it only takes five minutes to apply.

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