One of the most common
questions I am asked as a mortgage broker is "What is your lowest rate?”. No one wants to pay more than they need to.
Sometimes the lowest rate is not what you should be looking for. A good mortgage
broker will ask you lots of questions about what your financing scenario looks
like and find the best mortgage for your needs.
I have detailed below
a variety of situations that can affect the mortgage rate you can secure.
Owner Occupied VS Rented
Lenders prefer the
borrower to live in the property being financed. There is a greater incentive
to make the mortgage payments when your primary residence is at risk. When a
borrower finances to buy a rental property the rate offered is often higher
than if the borrower resides in the property.
Personal Name VS Holding Company
Similar to the item
above, when a rental property is being purchased, the owner may wish to have
the property in the name of a holding company and provide a personal guarantee.
This is not looked at favourably by all lenders and many lenders will not allow
this. When a lender that does allow a holding company scenario, they know they
are in a small group of lenders that do, and when a situation like this exists,
most lenders will charge a slightly higher rate to do business with them in
this way.
Credit Score
The better your credit
score the greater opportunity the borrower has to secure the lenders best rate.
If you have a poor payment history showing on your credit report it is a strong
indication that you will be late with your mortgage payments, and the best
rates are reserved for borrowers that show they consistently pay their bills on
time.
Conventional VS High Ratio
You would tend to
think that the borrower with a down payment greater than 20% would get a lower
mortgage rate than the borrower with a down payment of only, 5, 10 or even 15%,
but that is not generally the case. The borrower with the smaller down payment
will have to pay high ratio insurance through a provider like Canada Mortgage
and Housing Corporation (CMHC) and that means the lender is guaranteed to get
all their money back in the event the borrower defaults on the mortgage,
regardless of a default at the same time, real estate prices drop. The lender
can take all these high ratio insured mortgages, package them into a bundle of
mortgage back securities and sell them off to institutional investors (the
lender would still administer the mortgage). These insured mortgages can be
sold off faster, and when the lender can do this, they can offer a lower mortgage
rate and still make good money.
Loan To Value on Conventional
We have established
that the lowest mortgage rates are offered to the borrower that has the smaller
down payment when the mortgage is insured. If the borrower has more than 20%
down payment but not quite a full 35% down payment, the lender might have "Risk
Based Pricing”. For each increment between a mortgage that is equal to 65% of
the property value up to 70% then 70% to 75% and 75% to 80% the lender might
have an incrementally higher rate. When the borrower has more than a 35% down payment
and the mortgage is less than 65% of the value, the lender will often offer a
rate as low as the high ratio rate. Not all lenders will have rates that vary
but an increasing number are now offering this style of rate pricing.
Down payment Saved VS Borrowed
When the borrower is
borrowing some or all of their down payment, they don’t have as much true
equity in the property and the lender will charge a slightly higher rate. For
example there are programs that allow qualified borrowers to borrow against a
line of credit, borrow from family or borrow against an existing asset to come
up with the down payment. Borrowing for the down payment is not the same as
getting a gift from family members.
Quick Closing VS Long Closing
Some lenders will
offer a slightly lower rate if you approach them for your mortgage approval and
have a closing date within 30 to 45 days later, they can move your paper from
the underwriting stage to the funding stage within a short period of time, compared
to having it sit around the office for up to 4 months before completion and
they save money by not having to look at it several times. This savings can be
passed on to the borrower with a lower rate when the completion is less than
the typical 90 day period.
Prepayment Penalties and Sales Clause
The mortgage with the
lowest rate is not always the best mortgage. Several mortgage lenders have
products that do not allow you to pay off your mortgage in full before the end
of your term. You could win the lottery and not be allowed to pay off your
mortgage unless you are selling your home, and even then the penalty could be
higher with comparable lenders that don’t have this clause. You may also want
to refinance your mortgage and borrow against the equity for a variety of
reasons and the lender will say no. When a clause like this exists the lender
knows you are committed to them for the full term and they offer a lower rate.
This type of clause won’t likely hurt the borrower with 5% down as they are
unlikely to try and refinance so under some conditions this could be the ideal
mortgage for the borrower.
Pre Approval VS Live Deal
Some, but not all
lenders, reserve their best mortgage rates when you are approaching them with a
live deal (you have an accepted offer and you need a full approval) compared to
just asking for a 120 day pre approval. Lenders offering a pre approval may
offer a slightly higher mortgage rate to hedge their cost of borrowing, when
you have a live deal, and if rates have not changed you can request the lower
rate. If the rates have gone up, then the slightly higher initial rate isn’t a
bad thing.
Summary
There are a variety of
reason that two people applying for mortgages would be offered different
interest rates. Working with an experienced mortgage broker is a great way to
understand what rates would be available to you, based on your circumstances
and criteria as outlined above.
Feel free to give me a
call if you want to know your options, we make mortgage shopping easy by
educating and motivating you to make intelligent mortgage choices.
