As mortgage Brokers we get to discuss mortgage rates daily and to be honest trying to explain why one rate is different to another based on the type of mortgage, amortization etc. can become repetitive over time however I do realise that there is a lot of unclear information out there especially on the internet regarding mortgage rates so I thought I would try to explain why there are different residential mortgage rate quotes in the market and why you may find yourself in one rate box and not the other. (Please note I am referring to A lending products i.e. best terms and rates. B or Alt A lending fall under another category)
Most online rate quotes will quote the lowest possible rate in the market to draw you in without an explanation on the mortgage product it is attached too. As a result, this can leave a borrower confused and frustrated when applying for a mortgage but then been told sorry you do not qualify for that rate.
Mortgage rates are related to the type of mortgage product you are obtaining and although credit and income are very important factors for qualifying it is the mortgage product type that will dictate the rate once approved.
Insured Mortgages are those mortgages that are backed by one of the three mortgage insurance companies in Canada. The most well know is CMHC however there is also Genworth and Canada Guaranty. A mortgage can be insured in two ways. One is a High Ratio mortgage. This is when a borrower purchases a property with less then 20% and therefore pays the insurance premium which is added to the mortgage. For this type of mortgage, the purchase price must be under $1,000,000.00 to be insured and the amortization can be no longer then 25 years.
Insured mortgage with no premium. If you are purchasing a mortgage with 20% or more down, you can get an insured mortgage (this just means your mortgage is insured in the back end by the insurer), but you pay no insurance premium. Again, the purchase price must be under $1,000,000.00 and a maximum of 25 years amortization.
Both these options above will get you the lowest rates on the market and typically these are the rates you see quoted on-line. A third option is If your mortgage is up for renewal and you do not take out any extra money (refinance) you can also qualify for insured mortgage pricing with no insurance premium. You must meet the same criteria as above, property value under $1,000,000.00 with a maximum of 25 years remaining on your amortization.
Current insured 5-year insured mortgage rates are between 2.69% and 2.79% on a fixed and 2.85% to 2.95% on a variable.
There is also No Frill insured mortgages available where one can get another 10bps to 20bps off the mortgage rate, but you give up something in return. There are clauses such as a bonafide sale clause: this means you cannot break the mortgage throughout the term unless you sale the property or higher penalties clause means you pay a lot more in penalties to break the mortgage. Be aware of these No Frill mortgages. They look tempting but you can get burned if you run into a situation where you need to get out of the mortgage before the term is up. You need to decide on whether the extra savings is worth the risk or not.
Non-Insured mortgages (sometime called conventional mortgages) are mortgages that have a purchase price over $1,000,000.00, or a refinance (adding more money to the mortgage or taken out a secured line of credit) or an amortization of 30 years. So, for example, if you are purchasing a home that is over $1,000,000.00 you cannot get an insured mortgage and you must have at least 20% down. If you are refinancing to consolidate debt, take out equity for a down payment on another purchase, add on a secured line of credit or something else this mortgage cannot be insured. Benefits of non-insured mortgages are that you can extend the amortization to 30 years to keep your payment lower, qualify for more borrowing, you can take out equity or consolidate debt. Mortgage rates for 5-year non-insured mortgages are in the 3.04% to 3.09% for fixed and 3.30% to 3.40% for variable.
So, as you can see there is a spread between insured and non insure mortgages rates. If you are purchasing for over a $1,000,000.00, refinancing or need a 30-year amortization then you cannot get the insured pricing, so the rate quote you see online of 2.79% etc. are meaningless to your requirements.
Rental properties whether a purchase or refinance come with a rate premium of another 20bps to 25bps above the conventional non-insured mortgage rate pricing.
It is not just about the rate: When deciding on your mortgage focus on the mortgage that best fits your needs. Maybe you can qualify for an insured pricing at 20% down but the payment over 25 years is too high. In this case you take a 30 Year amortization with a higher rate, but your monthly cash flow is much better because of the lower payment which suits your lifestyle and that is the most important thing to you right now. You can always increase your mortgage payment later to pay down your mortgage more aggressively.
Have a great weekend
Residential and Commercial Mortgage Agent
SAFEBRIDGE Financial Group
Broker License #10524
Direct Line | 416-899-1467
Fax | 1866 385-4049
E-mail | firstname.lastname@example.org