RSS

7 Strategies to Secure a Lower Mortgage Rate

Interest rates have risen rapidly this year, triggered by the Bank of Canada’s efforts to curb inflation. Variable mortgages are typically pegged to the lender’s prime rate, which means they are immediately affected by rising interest rates. Homeowners with fixed mortgages aren’t impacted as quickly because their interest rate is locked in, but they will face higher rates, as well, when their mortgages are up for renewal. And many homebuyers are finding it increasingly difficult to afford or even qualify for a mortgage at today’s elevated rates.

 Fortunately, there are steps you can take to strengthen your position if you have plans to buy a home or renew an existing mortgage. Try these eight strategies to help secure the best available rate:


1.      Raise Your Credit Score

Borrowers with higher credit scores are viewed as “less risky” to lenders, so they are offered lower interest rates. A “good” credit score typically starts at 660 and can move up into the 800s. If you don’t know your score, you can access it online from Canada’s two primary credit bureaus, Equifax and Transunion.

 Then, if your credit score is low, you can take steps to improve it, including:

  • Correct any errors on your credit reports, which can bring down your score. You can request free copies of your reports through the Equifax and Transunion websites.
  • Pay down revolving debt. This includes credit card balances and home equity lines of credit.
  • Avoid closing old credit card accounts in good standing. It could lower your score by shortening your credit history and shrinking your total available credit.
  • Make all future payments on time. Payment history is a primary factor in determining your credit score, so make it a priority.
  • Limit your credit applications to avoid having your score dinged by too many inquiries. If you’re shopping around for a car loan or mortgage, minimize the impact by limiting your applications to a two-week period.

 Over time, you should start to see your credit score climb — which will help you qualify for a lower mortgage rate.


2.      Keep Steady Employment

If you are preparing to purchase a home, it might not be the best time to make a major career change. Unfortunately, frequent job moves or gaps in your resume could hurt your borrower eligibility.

When you apply for a new mortgage, lenders will typically review your employment and income history and look for evidence that you've been financially stable for at least two years. If you’ve earned a steady paycheck, you could qualify for a better interest rate. A stable employment history gives lenders more confidence in your ability to repay the loan.

That doesn’t mean a job change will automatically disqualify you from purchasing a home. But certain moves, like switching from corporate employment to freelance or self-employment status, could force you to delay your purchase, since lenders will want to see proof of steady, long-term earnings.

 

3.      Lower Your Debt-Service Ratio

Even with a high credit score and a great job, lenders will be concerned if your debt payments are consuming too much of your income. That’s where your debt service ratios will come into play.

 There are two types of debt service ratios:

 1. Gross debt service (GDS) — What percentage of your gross monthly income will go towards covering housing expenses (mortgage, property taxes, utilities, and 50% of condo maintenance fees)?

2. Total debt service (TDS) — What percentage of your gross monthly income will go towards covering ALL debt obligations (housing expenses, credit cards, student loans, and other debt)?

 What’s considered a good debt service ratio? Lenders typically want to see a GDS ratio that’s no higher than 32% and a TDS ratio that’s 40% or less.

 Low debt service ratios will also help you pass a mortgage stress test, which is required by all Canadian banks and some other types of lenders. The stress test is designed to help ensure you can continue to afford your mortgage payments even if interest rates rise. You can use the government of Canada's Mortgage Qualifier Tool to calculate how much you can afford to borrow.

 If your debt service ratios are too high, or you can’t pass a mortgage stress test, you may need to consider purchasing a less expensive home, increasing your down payment, or paying down your existing debt. A bump in your monthly income will also help.


4.       Increase your down payment

Minimum down payment requirements vary by loan size and property type. But, in some cases, you can qualify for a lower mortgage rate if you make a larger down payment.

 Why do lenders care about your down payment size? Because borrowers with significant equity in their homes are less likely to default on their mortgages. That’s why you will be required to purchase mortgage default insurance if you put down less than 20%.

 It’s important to note that some lenders offer discount rates for borrowers who put down less than 20% – because the required default insurance protects them from any potential loss. However, the cost of CMHC or private mortgage default insurance will typically exceed any interest savings. You'll also have to pay interest on that insurance if you add it to your mortgage. The bottom line: you’ll save money in borrowing costs if you can afford a larger down payment.

 Fortunately, there are a couple of government-initiated resources designed to help eligible first-time home buyers with a down payment, including:

  • Home Buyers’ Plan (HBP) – Buyers may withdraw up to $35,000 (tax-free) from their Registered Retirement Savings Plan(RRSP). The money must be used to build or purchase a qualifying home and repaid to the RRSP within 15 years.
  • First-Time Home Buyer Incentive – Buyers can take advantage of a shared-equity mortgage with the Government of Canada. Essentially, the Government will put 5% or 10% towards your down payment, interest-free, in exchange for a limited equity share of your property. The repayment is due in 25 years or when you sell your home.


5.      Weigh interest rate options

All mortgages are not created equal, and some may be a better fit than others, depending on your priorities and risk tolerance. For starters, there are several interest rate options to choose from:

  • Fixed — You’re guaranteed to keep the same interest rate for the entire length of the loan. Many buyers prefer a fixed rate because it offers them predictability and stability. However, you’ll pay a premium for it, as these mortgages typically have a higher interest rate to start. And if rates fall, you’ll be locked into that higher rate.
  • Variable — Your interest rate will rise or fall along with your lender’s prime rate. You can choose either an adjustable or a fixed monthly payment. However, if you opt for a fixed payment, the amount that goes towards principal and interest each month will fluctuate depending on the current rate. Variable-rate mortgages typically offer lower interest rates to start but run the risk of increasing.
  • Hybrid – Can’t decide between a fixed or variable rate? Hybrid mortgages attempt to address that dilemma. A portion of the mortgage will have a fixed rate and the remainder will have a variable rate. The fixed gives you some protection if rates go up, while the variable offers some benefit if rates fall.

What’s the best choice if you’re looking for the lowest mortgage rate? The answer is…it depends. If mortgage rates don’t rise much higher, or drop back down in a couple of years, you could win by opting for a variable rate. However, if they continue to climb, you may be better off with a fixed rate. Talk to a mortgage broker for personalized advice!

 

6.      Compare loan terms

A mortgage term is the length of time your mortgage agreement is in effect. At the end of the term, a mortgage holder will need to either pay off their mortgage or renew for another term.

 There are three major types of mortgage terms:

  • Shorter-term – These can range from 6 months to 5 years, and they are the most popular type in Canada. Borrowers can choose between a fixed or variable interest rate.
  • Longer-term – These are longer than 5 years but generally no more than 10 years in length. Longer-term mortgages are more likely to feature fixed-interest rates and hefty prepayment penalties.
  • Convertible – Offers the option to extend a shorter-term mortgage to a longer-term mortgage, typically at a different interest rate.

Which loan term offers the lowest rate? A shorter-term mortgage will typically feature a lower interest rate than a longer-term mortgage. However, the rate on a 1-year or a 3-year mortgage could be higher or lower than a 5-year mortgage depending on the current economic climate and whether it’s fixed or variable. To find the best rate, you’ll need to compare your options at the time of purchase or renewal.


7.       Get quotes from multiple lenders

When shopping for a mortgage, be sure to solicit quotes from several different lenders and lender types to compare the interest rates and fees. Depending upon your situation, you could find that one institution offers a better deal for the type of loan and term length you want.

 Ideally, you should begin this process before you start looking for a home. If you get preapproved for a mortgage, in most cases, you can lock in the mortgage rate for 90 to 120 days. This is especially important when interest rates are rising.

Some borrowers choose to work with a mortgage broker. Like an insurance broker, they can help you gather quotes and find the best rate. They’re paid a commission by the lender, so it won’t cost you anything out of pocket to use a broker. However, make sure you find out which lenders they work with and contact more than one so you can compare their recommendations.


Getting Started

Unfortunately, the rock-bottom mortgage rates we saw during the height of the pandemic are behind us. However, today’s 5-year fixed rates still fall beneath the historical average — and are well below the all-time peak of 20.75% in 1981.

And although higher mortgage rates have made it more expensive to finance a home purchase, they have also ushered in a more balanced market. Consequently, today’s buyers are finding more homes to choose from, a better value for their investment, and sellers who are willing to negotiate. I hope you found this information useful! As a realtor specializing in the Liberty Village and Toronto real estate market, I am here to help guide you through the entire buying or selling process. Don't forget to grab a copy of my FREE Toronto guide by reaching out to me on the Contact page or on my social media. I look forward to speaking with you!  

Read

Rising Rates- Should I Continue Renting or Consider Buying?

Deciding whether to jump into the housing market or rent instead is not an easy decision – especially if you’re a first-time homebuyer. But in today’s whirlwind market, you may find it particularly challenging to pinpoint the best time to start exploring homeownership.

A real estate boom during the pandemic pushed home prices to an all-time high. Add higher mortgage rates to the mix, and some would-be buyers are wondering if they should wait to see if prices or rates come down.

But is renting a better alternative? Rents have also soared along with inflation – and are likely to continue climbing due to a persistent housing shortage.2 And while homebuyers can lock in a set mortgage payment, renters are at the mercy of these rising costs for the foreseeable future.

 So, what's the better choice for you? There’s a lot to consider when it comes to buying versus renting. Luckily, you don’t have to do it alone. Reach out to schedule a free consultation and we'll help walk you through your options. You may also find it helpful to ask yourself the following questions:


How long do I plan to stay in the home?

You'll get the most financial benefit from a home purchase if you own the property for at least five years. If you plan to sell in a shorter period of time, a home purchase may not be the best choice for you. There are costs associated with buying and selling a home, and it may take time for the property’s value to rise enough to offset those expenditures. Even though housing markets can shift from one year to the next, you’ll typically find that a home’s value will ride out a market’s ups and downs and appreciate with time. The longer you own a property, the more you are likely to benefit from its appreciation. Once you’ve found a community that you’d like to stay in for several years, then buying over renting can really pay off. You’ll not only benefit from appreciation, but you’ll also build equity as you pay down your mortgage – and you’ll have more security and stability overall.

Also important: If you plan to stay in the home for the life of the mortgage, there will come a time when you no longer have to make those payments. As a result, your housing costs will drop dramatically, while your equity (and net worth) continue to grow.


Is it a better value to buy or rent in my area?

 If you know you plan to stay put for at least five years, you should consider whether buying or renting is the better bargain in your area. One helpful tool for deciding is a neighbourhood’s price-to-rent ratio: just divide the median home price by the median yearly rent price. The higher the price-to-rent ratio is, the more expensive it is to buy compared to rent. Keep in mind, though, that this equation provides only a snapshot of where the market stands today. As such, it may not accurately account for the full impact of rising home values and rent increases over the long term. According to data from the Canadian Real Estate Association, a homeowner who purchased an average-priced Canadian home 10 years ago would have gained roughly $285,000 in equity — all while maintaining a steady mortgage payment. In contrast, someone who chose to rent during that same period would have not only missed out on those equity gains, but they would have also seen average Canadian rental prices increase by around 34%. So even if renting seems like a better bargain today, buying could be the better long-term financial play.

Ready to compare your options? Then reach out to schedule a free consultation. As local market experts, we can help you interpret the numbers to determine if buying or renting is a better value in your particular neighbourhood.


Can I afford to be a homeowner?

If you determine that buying a home is the better value, you’ll want to evaluate your financial readiness. Start by examining how much you have in savings. After committing a down payment and closing costs, will you still have enough money left over for ancillary expenses and emergencies? If not, that’s a sign you may be better off waiting until you’ve built a larger rainy-day fund. Then consider how your monthly budget will be impacted. Remember, your monthly mortgage payment won’t be your only expense going forward. You may also need to factor in property taxes, insurance, association fees, maintenance, and repairs.

Still, you could find that the monthly cost of homeownership is comparable to renting, especially if you make a sizable down payment. Landlords often pass the extra costs of homeowning onto tenants, so it’s not always the cheaper option. Plus, even though you’ll be in charge of financing your home’s upkeep if you buy, you’ll also be the one who stands to benefit from the fruits of your investment. Every major upgrade, for example, not only makes your home a nicer place to live; it also helps boost your home's market value. If you want to buy a home but aren’t sure you can afford it, give me a call to discuss your goals and budget. I can give you a realistic assessment of your options and help you determine if your homeowning dreams are within reach.


Can I qualify for a mortgage?

 If you’re prepared to handle the costs of homeownership, you’ll next want to look into how likely you are to pass Canada's mortgage stress test and get approved for a mortgage. Every borrower who applies for a mortgage from a federally-regulated lender, such as a bank, must pass a mortgage stress test – even if you have an ample down payment. (Some smaller lenders that aren't federally regulated, such as credit unions, may also put your mortgage application through a stress test, but they aren't required to do so.) To conduct the test, a lender will consider your qualifying income, estimated expenses (such as condo fees or non-mortgage-related debt), and prospective mortgage amount and calculate whether you'd still be able to afford the mortgage if your rate rose by a certain amount. You can also conduct your own mock stress test by inputting some income and expense estimates into the Government of Canada's Mortgage Qualifier Tool. Every lender will also have its own approval criteria separate from the feds' minimum. But, in general, you can expect a creditor to scrutinize your job stability, credit history, and savings to make sure you can handle a monthly mortgage payment. For example, lenders like to see evidence that your income is stable and predictable. So if you’re self-employed, you may need to provide additional documentation proving that your earnings are dependable.

A lender will also compare your monthly debt payments to your income to make sure you aren't at risk of becoming financially overextended. In addition, a lender will check your credit report to verify that you have a history of on-time payments and can be trusted to pay your bills. Generally, the higher your credit score, the better your odds of securing a competitive rate. Whatever your circumstances, it’s always a good idea to get preapproved for a mortgage before you start house hunting.


How would owning a home change my life?

Before you begin the preapproval process, however, it’s important to consider how homeownership would affect your life, aside from the long-term financial gains. In general, you should be prepared to invest more time and energy in owning a home than you do renting. There can be a fair amount of upkeep involved, especially if you buy a fixer-upper or overcommit yourself to a lot of DIY projects. If you’ve only lived in an apartment, for example, you could be surprised by the amount of time you spend maintaining a lawn. On the other hand, you might relish the chance to tinker in your very own garden, make HGTV-inspired improvements, or play with your dog in a big backyard. Or, if you’re more social, you might enjoy hosting family gatherings or attending block parties with other committed homeowners. The great thing about owning a home is that you can generally do what you want with it – even if that means painting your walls fiesta red one month and eggplant purple the next.


The choice – like the home – is all yours. 


The decision to buy or rent a home is among the most consequential you will make in your lifetime. I can make the process easier by helping you compare your options using real-time local market data. So don't hesitate to reach out for a personalized consultation, regardless of where you are in your deliberations. I would be happy to answer any of your questions and identify actionable steps you can take now to reach your long-term goals. I hope you found this information useful! As a realtor specializing in the Liberty Village and Toronto real estate market, I am here to help guide you through the entire buying or selling process. Don't forget to grab a copy of my FREE Toronto guide by reaching out to me on the Contact page or on my social media. I look forward to speaking with you! 

Read

Latest Blog Posts

I have sold a property at 107 2502 Rutherford RD in Vaughan
Sold Listings

I have sold a property at 107 2502 Rutherford RD in Vaughan

I have sold a property at 107 2502 Rutherford RD in Vaughan on May 27, 2024. See details here Welcome To Villa Giardino, This Condo ...

READ POST
New property listed in Maple, Vaughan
New Listings

New property listed in Maple, Vaughan

I have listed a new property at 107 2502 Rutherford RD in Vaughan. See details here Welcome To Villa Giardino, This Condo Exudes a ...

READ POST
I have sold a property at 2017 65 East Liberty ST in Toronto
Sold Listings

I have sold a property at 2017 65 East Liberty ST in Toronto

I have sold a property at 2017 65 East Liberty ST in Toronto on Feb 15, 2024. See details here Tired of Shoebox Condos? This Extra ...

READ POST
New property listed in Waterfront Communities C1, Toronto C01
New Listings

New property listed in Waterfront Communities C1, Toronto C01

I have listed a new property at 2017 65 East Liberty ST in Toronto. See details here Tired of Shoebox Condos? This Extra Wide 1 Bedroom ...

READ POST