What’s your best rate?

Usually the first question I get asked, and the last one I answer…

Without asking about 20 other questions first, the only answer I can reasonably give is… it depends.

There is no one rate, there is no single client scenario. With the numerous changes to the mortgage rules over the last several years things have gotten a lot more complicated. There are several different types of lenders that Mortgage Specialists deal with and there are now three main categories that rates fall into.

How are rates calculated?

Percentage of home value being financed (Loan to Value) and purpose of financing:

  • Insured rates are provided to clients with less than 20% equity in their home, thus requiring insurance. These apply to purchases, transfers or switches and are typically the best available rates… however the insurance coverage comes with a cost that far outweighs the .05% or .10% discount on the rate
  • Insurable rates are provided to clients with 20% or more equity in their home who are purchasing, transferring or switching between lenders.
  • Non-insurable rates refer to mortgage scenarios that do not meet Insurer guidelines and typically apply mostly to refinances

Credit score of applicants

  • Many lenders provide preferential rates for clients with strong credit scores, with 650 – 680 typically being the minimum required for the best rates.

There are other factors involved, but the two categories above the most important.

Other factors to consider besides rates.

Pre-payment penalties.

While hardly anyone makes a contract with the intention of breaking it, mortgage terms are broken before maturity on a pretty regular basis. According to Mortgage Professionals Canada, 54% of borrowers opt for a five year term. This may be because they feel more secure in knowing their rate and payments are fixed for a significant period of time or it may be because that is the term they were encouraged to sign for by the lender they were dealing with.

At the time that you are buying your home or renewing your mortgage, it may seem like your life is stable and you are not expecting major changes to disrupt your plans over the next five years, but the reality is, life happens. Relationships are formed or dissolved, jobs are lost or transferred, families grow or shrink…

Reports show that the average borrower holds their mortgage for 3.8 years. So what happens when that homeowner (who signed for a five year mortgage term) breaks it at 3.8 years? They pay penalties! The standard calculation (although there is no magic formula and each lender has their own way of calculating penalties) is the greater of three months interest or an Interest-Rate Differential (IRD).

The IRD takes the difference between the current rate for the remaining term of the mortgage and the posted rate at the time the client signed their mortgage (NOT the actual contract rate). If the difference is negative, you pay the difference. If there is no loss to the lender then you just pay the three months interest. This penalty can add up to thousands out of your pocket.

Pre-Payment Privileges

Just as there are penalties to pre-pay your mortgage, many products also allow a certain amount that you are allowed to pay extra on your loan. If paying down your mortgage as quickly as possible is important to you, you’ll want to explore the many options available to do that.

On an annual basis, many lenders allow a lump sum payment of between 10% and 20%. It is also common to have the ability to increase your monthly payments by a percentage on a regular basis.

These privileges can help you take years off your mortgage, and save thousands in interest costs over the life of the loan.

Collateral vs. Conventional Charges

How the lender registers the mortgage charge against your property is also important. In a conventional charge, the amount is typically equal to the amount you have borrowed, whereas with a collateral charge, lenders will often register up to 125% of the value of the property. The reasoning behind this is to allow you the potential of additional future borrowings without the “hassle” of going through the legal process and fees, however a collateral charge is very limiting and can prevent you from obtaining secondary financing later on if required, or from transferring or switching your mortgage to another Lender. The costs involved in breaking the mortgage at that point far outweigh the few hundred dollars that the legal fees would have potentially cost you.

To sum up, while rate is, of course, an important feature to consider when shopping for a mortgage, the true benefit of dealing with a Mortgage Professional is to choose the product that is the right fit for your individual circumstances and needs. Saving a few hundred dollars today isn’t worth paying a few thousand in a couple of years from making the wrong choice.

Brenda St Amand is a licensed Mortgage Agent in Barrie, ON.  Working with 11 others Agents and Brokers through Mortgage Sense Inc., she has access to over 30 different lenders and their product offerings.  As a financial professional for over twenty five years, Brenda is known for always putting her clients first and being flexible and understanding of their needs.

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