How to Find the Best Mortgage Rate

Finding the best mortgage rate is easy if you know exactly what you are looking for in the long-term

It’s crucial to do your research before applying for a mortgage. Getting a mortgage is often the largest financial commitment a person makes in their lifetime. Prospective homeowners shop around for the best mortgage rates first, so it’s no accident that one of the first things they do is compare rates. And while getting a great rate is important, if that’s your only focus, it could end up costing you.

In this article, I’ll show you how to find the lowest mortgage rates, but more importantly, I’ll take you beyond the rate, and tell you everything you need to know about choosing the right mortgage for you. But first, let’s review a couple of important mortgage terms that you’ll want to be familiar with.

The Difference Between Mortgage Term and Amortization

Both the term and amortization of a mortgage, refer to a period of time. The amortization of a mortgage represents the entire repayment period of the mortgage. In other words, the number of years before your mortgage will be paid in full. In Canada, the standard amortization period for most mortgages is 25 years, in fact, 25 years is the maximum amortization for any mortgage that is insured by the Canada Mortgage and Housing Corporation (CMHC). Conventional mortgages (non-CMHC) can often be stretched over 30 years. We’ll get into the difference between insured and conventional mortgages further down.

What Is the Difference Between the APR and the Interest Rate?

The Annual Percentage Rate (APR) is the true cost of the mortgage. It takes into account all the fees and charges you pay when you receive the mortgage (such as closing costs) and spreads those out over the life of the loan so you can get an idea via an annualized rate of what you’re actually paying.

By contrast, your stated interest rate is the number used to determine your monthly payment. It’s the percentage of the loan balance you pay in interest on an annual basis, no extra costs included. Of the two, the APR provides more of a big picture glance at what you’ll pay.

The federal government requires banks to list the APR to preclude hidden or unexpected fees. Looking at the APR can be useful when comparing two different loans, especially when one has a relatively low interest rate and higher closing costs and the other has a higher interest rate but low closing costs. The mortgage with the lower APR might be the overall better deal.

The APR is generally higher than the stated interest rate to take in account all the fees and costs. Usually it’s only a few fractions of a percent higher, though — you should give anything larger than that a hard second look. When you’re exploring 40-year mortgage rates and 30-year mortgage rates, those fees are spread out over a longer period of time. The APR probably won’t be much higher than the interest rate. But for 20-year mortgage rates, 15-year mortgage rates and 10-year mortgage rates, the difference between the APR and the interest rate will likely be greater.

Should I Choose my Mortgage Based on the APR?

The APR is a great tool for comparing two mortgages with different terms, but it’s ultimately important to consider all aspects of your loan when making a decision. For example, if your savings account is well-stocked, you may be willing to pay some higher closing costs for a loan with a lower monthly payment that is more in line with your regular income.

And there are other, non-financial factors as well. Every mortgage lender does business its own way. Some use a personal touch with each customer and others offer the most cutting-edge technology to make your borrowing experience easy. Do you prefer a small, local institution? An online lender? A national bank with a 100-year history and an established reputation? There’s no right answer to any of these questions, but they are important to think about nonetheless. You could be making payments on your mortgage for 30 years, so you should find a lender that suits your needs.

Before you sign your papers, it’s a good idea to research your lender. Read reviews, the company website and any home buying material the lender publishes. It can help you get an idea of the company before you do business.

Conventional vs. Insured Mortgage (CMHC)

Whether your mortgage will be conventional or CMHC insured depends on the amount you have available for a down payment. To qualify for a conventional mortgage, you’ll need to provide at least 20% of the purchase price as a down payment. That can be difficult for many new homeowners, especially in expensive markets like Toronto, or Vancouver, which is why Canada Mortgage and Housing Corporation(CMHC) enables borrowers to obtain an insured mortgage with as little as 5% down.

The tradeoff is that CMHC charges a premium which is paid by the mortgagor aka, the borrower. What many people don’t realize is that CMHC is actually insuring the bank, not the borrower, in case the mortgage is defaulted upon, with the bank passing along the cost of the insurance to the borrower.

The impact of CMHC premiums on the overall cost of a mortgage can be significant and should be taken into account when deciding how much mortgage you can afford. To illustrate the difference between conventional and CMHC, let’s assume the purchase of a $300,000 home:

Conventional Mortgage, 20% down payment

Purchase price of $300,000 – $60,000 down = $240,000 Total Mortgage Amount

CMHC Insured Mortgage, 5% down payment

Purchase price, $300,000 – $15,000 down payment + $11,400 CMHC premium (4%) = $296,400 Total Mortgage Amount

In the first scenario, assuming a 25-year amortization, monthly payments, and an interest rate of 2.87%, your total cost to pay off the mortgage would be $335,952.

Using the same criteria, the CMHC mortgage would cost over $414,000, a difference of almost $80,000!

Of course, interest rates will change over the years, and there are other incidental costs I haven’t included, such as the PST on the CMHC premium, but this gives you an idea of why getting the best interest rate shouldn’t be the only consideration when shopping for a mortgage.

Fixed Rate vs. Variable Mortgage

One decision you’ll need to make is whether to go with a fixed or variable mortgage. With a fixed mortgage, the bank is guaranteeing you an interest rate that won’t change for the length of the term you choose. For example, if you went with a 5-year mortgage term, at a rate of 2.99%, you’d have the security knowing that your rate won’t change for the next 60 months. You have a peace of mind knowing that your mortgage payment amount also, won’t change.

With a variable rate, you’re choosing a floating rate that is tied to a benchmark rate, usually the Bank of Canada prime rate, or your bank’s prime rate, which may differ slightly. While fixed rates offer safety, and cost certainty, variable rates offer their own advantages.

With a variable rate, you stand to benefit in a falling rate environment. If the Bank of Canada reduces the prime rate, your mortgage rate will drop accordingly. Not only that but if fixed rates drop, you usually have the option of switching into a lower fixed rate at any time. With a fixed rate, it’s much more difficult to get out of your existing term without paying a large penalty.

The risk with a variable rate mortgage is that if rates increase sharply, you could find yourself in the precarious situation of having to increase your mortgage payment in order to keep up with the contractual amortization.

Understanding Your Mortgage Prepayment Options

This is one that not a lot of people think about when shopping for a mortgage. Even if you go with a closed mortgage, most financial institutions will allow you to pay the mortgage down ahead of schedule, by providing the borrower with various prepayment options.

However, not all mortgages are created equal. In other words, the prepayment flexibility can vary greatly between mortgage providers. Some banks or credit unions will allow you make lump sum payments of 10% of the original mortgage amount each calendar year, others will allow 15%.

To use another example, both CIBC and TD Bank will allow you to increase your regular monthly principal and interest rates by double (100%) without any penalties, while other institutions will only allow you to increase your payment by 10-20%. If you have a lot of budget flexibility and plan to pay down your mortgage more quickly, the difference in policy could save you thousands. When shopping for a mortgage, make sure you understand the prepayment options that are offered.

Mortgage Rate Examples

So let’s say you have a very good to exceptional FICO credit score (between 750 and 850), savings and assets for the recommended 20% down payment and a net income that is more than three times your monthly payment. You’re looking good.

Lenders would see you as a reliable borrower who is likely to make payments on time, so you would probably qualify for the lowest advertised mortgage rates.

However, if your credit score isn’t high and you don’t have savings for a down payment, your lender may deny your mortgage application or point you in the direction of government-backed loans from the Department of Housing and Urban Development (HUD) or the Federal Housing Administration (FHA). Most federally sponsored programs allow lenders who have fair or good credit scores to qualify for home loans even if they don’t meet all traditional metrics. Such risk factors may include a higher debt-to-income ratio. These programs generally offer 30-year fixed rate loans and reduced down payments that homeowners can finance or pay with grants, if available. While these can be advantageous for borrowers who can’t qualify for a traditional home loan, they typically come with a type of mortgage insurance, which will add to the cost of your monthly housing payments

Should Deal with My Bank, or Go Through a Mortgage Broker?

One of the decisions you’ll need to make when you begin your search for a mortgage is whether to go directly through your bank or deal with a mortgage broker. For years now, mortgage brokers have been a popular option, and represent a perfectly valid solution. But like anything else, there are pros and cons to each.

A mortgage broker offers some key advantages. For starters, they deal with dozens of financial institutions, so they really are a great place to go, to source out the best mortgage rate.

If you’re not considered a strong borrower, perhaps your credit history isn’t great, a mortgage broker can find a financial institution that will be willing to take on your application. Generally speaking, Canada’s big six banks tend to be the most conservative when it comes to mortgage lending, so it can be tough to meet their criteria if your credit is less than stellar, or your employment situation is not standard. This is where a broker can add value.

Don’t expect to get a huge break on your mortgage interest rate just because you’re going through a broker, however. There is a misconception out there, that your bank won’t give you their best rate, but that’s not really true. The mortgage business has become so competitive, and borrowers are so well educated in our online world, that banks know that they won’t have a chance at earning your business if they don’t come to the table with a very competitive rate. So competitive in fact, that your average bank mortgage advisor usually only has a tenth of a percent, or less, of room to negotiate on the rate.

The big advantage of getting your mortgage directly through a bank happens after your mortgage goes through. That is, your bank’s mortgage advisor will still be there to help you maintain your mortgage along the way, make changes, answer questions, etc. Once a mortgage broker sets you up with a mortgage, they get their commission, and they’re moving onto the next customer. They get paid to find new mortgages, not maintain them, and so, that’s where the relationship usually ends. Ultimately, the decision of whether to go through your bank or through a mortgage broker, comes down to the type of support you’re looking for.

Finding the Best Mortgage Rate

As you can see in the above graph, mortgage rates change year after year, so the factors impacting your potential mortgage rate aren’t entirely in your hands. Of course, controlling some factors that dictate your mortgage rate are totally in your power. Snagging a lower rate is all about making yourself appear a more trustworthy borrower.

You see, lenders charge different borrowers different rates based on how likely each person is to stop making payments (to default, in other words). Since the lender is fronting the money, the lender decides how much risk it’s willing to take. One way for lenders to mitigate losses is with higher interest rates for riskier borrowers.

Lenders have a number of ways to assess potential borrowers. As a general rule of thumb, lenders believe that someone with plenty of savings, steady income and a good or better score (which indicates a history of honoring financial obligations) is less likely to stop making payments. It would require a pretty drastic change in circumstances for this kind of homeowner to default.