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Mortgage rates can be a confusing topic. With so many mortgage products and variables to consider, lots of Canadians feel lost when it’s time to apply for a mortgage. While we can’t cover every bit of the topic at once, we can take it one step at a time. Here are some of the basics you should know about navigating mortgage rates, and what you should consider about your own application.
How to navigate mortgage rates
Let’s start by defining what a mortgage rate means in terms of your home purchase. You might already be familiar with how rates work, but a quick recap doesn’t hurt. Your mortgage rate is the interest you will pay on top of your mortgage. If you need $500,000 in mortgage financing, for example, you will be paying more than that because of the interest you will owe with each payment. Monthly payments are the most common method. If you owe $3000 per month and you have a six per cent interest rate, for example, you will pay six per cent on top of that $3000 every month.
What determines the rate you will receive?
So, what determines your mortgage rate? Mortgage rates depend on a variety of factors, some related to you, and some not. When Canadian interest rates change, this affects rates in the mortgage industry. That’s why mortgage rates have been rising in time with the Bank of Canada’s increases to the overnight rate. Mortgage rates today are higher than they were one year ago. Apart from this external factor, your specific mortgage rate depends on your situation. Your credit score, history, employment, and income all play a role in determining the rate a lender might qualify you for.
You will often see posted interest rates on lenders’ websites. Does this mean these are the rates all borrowers will receive if they apply for a mortgage? No. As we mentioned, a lot depends on your personal circumstances. Don’t rely on these posted rates when you make your buying plans!
Things to consider when reviewing rates
Your needs as a home buyer
Of course, your own needs should be your top priority when buying a home. This will help you find an option that works for you, and it will keep you on track. The first thing you should consider is how big your down payment will be compared to the purchase price of your home. Can you contribute 20 per cent, or will you enter the market sooner with a smaller down payment and pay for mortgage default insurance? Some people like to spend lots of time saving up before buying a home, while others want to start building equity sooner and choose to accept a bigger mortgage, often with a larger interest rate. You also need to think about your budget and how much you’re willing to pay for your home. The pricier your home, the bigger your mortgage, which means the more interest you will owe. It’s important to ensure you can afford your home purchase so you don’t end up being house poor.
It’s not all about the lowest rate
Remember, the lowest rate isn’t the only important part to consider! Many people assume the lowest rate is the best rate, because it will save them the most money, right? In theory this might be true, but it comes with some risks. If your low rate is part of a product that has very little support or flexibility, this can cost you. You might find that, down the road, you want to start paying off your mortgage early, or your current terms don’t suit you anymore. If your product doesn’t allow you to make prepayments, and the penalty for breaking your term is high, you might end up paying the price for your super-low rate.
The best mortgage product is one that suits your needs. If you want the option to make prepayments without facing penalties, or you want the flexibility to refinance without harsh fines, these should be priorities. A product with these options might be best for you, even if it doesn’t mean receiving the rock-bottom interest rate.
As mortgage brokers, we’re here to help you find the best product for your needs. If you have any questions about your mortgage, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.