Back in the day, mortgage rates were a lot more straightforward. Every lender had a single rate for a 5-year fixed mortgage and when someone inquired about the lowest rate, they’d get quoted for it. Today, things are more complex! One lender could have as many as seven different 5-year fixed mortgage rates each for a specific situation. This new complex system is why additional information is required before your lender can give you YOUR lowest-rate mortgage based on your unique situation.
So how exactly does this work? Well, there are a few different factors that can influence the mortgage rate you’re offered:
- The purchase price of your property
- Your closing date (whether it’s coming up or it has already passed)
- The percentage of down payment
- How you plan to use the property (home, business, rental, etc.)
Then, before we can establish your lowest possible mortgage rate based on that information, we have to determine which of these categories you fall into:
Insured mortgages are the easiest to understand. Anytime you purchase property with less than 20% down payment, mortgage default insurance will be required from either CMHC, Genworth or Canada Guaranty. The purpose is to protect the lender if the borrower were to default on the loan. The benefit to the homebuyer is that it allows them to buy with as little as 5% down payment. Without default insurance, all lenders would require a minimum down payment of 20%, which would put homeownership out of reach for many.
Insured mortgage rates often have the lowest mortgage rates, despite what you’d think. Sometimes it makes sense to go with an insured mortgage, and there can be several reasons for doing so, but getting a lower rate is not one of them. In order to offset the insurance premium, the mortgage rate would need to be roughly 0.70% lower on the insured mortgage … just to break even. You’re never going to see anywhere near that big of a difference in rate. Even if you did, you’re still not coming out ahead. You’re just breaking even. And that is IF you make it to the end of your term without breaking the mortgage. More than 60% of first-time homebuyers will end up breaking their mortgage before the end of the term!
The next lowest mortgage rate can be found with insurable mortgages. The terminology can definitely get confusing as insured and insurable sound quite similar, but they have different meanings. An insured mortgage is any mortgage carrying a borrower-paid mortgage default insurance premium, as described above. Insurable mortgages do not carry this premium; however, the mortgage lender will often insure the mortgage on the back end, which would be at their cost. Even with this added cost to the lender, it lowers their overall cost of funds, which they can then pass on to you with a lower rate.
The insurable category is the most complex of the three and requires buyers to meet specific criteria in order to qualify:
- Home value must be $999,999.99 or lower
- Amortization cannot exceed 25 years
- Property must be owner-occupied
The maximum amortization and usage of the home is fairly straight forward. The maximum home value is straight forward on purchases, but it’s not quite as cut and dry when it comes to currently owned property.
On November 30, 2016, new mortgage rules took effect which resulted in mortgages being placed into these classifications. If you purchased before that date, this rule would not apply. But if you refinanced after that date (took a new mortgage for a higher amount and/or increased your amortization), your mortgage would no longer qualify as insurable.
Unlike insured mortgages, insurable mortgages give you a better rate based on the percentage of down payment you plan to make or the amount of equity you already have in your home for existing mortgages.
A 35% or greater down payment/equity will often get you the lowest rates. In fact, mortgage rates in this category are very close to the insured rates, if not equal. The highest of the insurable rates can be found in the 20% – 24.99% category, which can be as much as 0.20% higher than rates in the 35% or greater category!
Last but not least, an uninsurable mortgage is any mortgage that does not fit within either of the above categories based on the following criteria:
- Home value at $1 million or greater (unless purchased before Nov. 30, 2016)
- Amortization greater than 25 years (maximum 30)
- Rental properties
Uninsurable mortgages will carry higher rates than what you would find in the insured or insurable category. They can, however, be similar to or just slightly higher than insurable mortgages with equity/down payment in the 20% – 24.99% range.
Unlike the insurable category, your down payment percentage, or amount of equity in the home, doesn’t have any effect on uninsurable mortgage rates. It doesn’t matter if your down payment is 20% or 50%, the same rate will apply. As the cost of funds to the lender doesn’t change based on down payment size, neither does your mortgage rate.
The world of mortgages can be a bit difficult to understand, but it’s so important that you do your homework in advance, so you know what to expect when you apply for a mortgage. Have questions? Need help? Contact us to learn more about your options!