Mar 29, 2023
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If you're caught up in the thrill of buying a home, it's easy not to think too hard about your mortgage rate. Does a difference of a few percent even matter?
You might be surprised.
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The Canadian Real Estate Association says the average price paid for a home in February 2023 was $662,437. If you discount the Greater Toronto Area and Greater Vancouver Area, this average drops by almost $135,000.
Let’s say you bought a home in March 2022 for the national average price of $796,000. You made a downpayment of 20%, or $159,200, and snagged a five-year fixed rate mortgage at 3.77%. With a 25-year amortization period, you would pay $111,563.61 in interest during the five-year term. That amount balloons to $344,432.24 over the life of the mortgage.
But if you bought the home in March 2023, and got a loan at 5.81%, you’ll be looking at interest charges of $173,890.95 for the five-year term, and a total of $563,994.33 over the lifetime.
Don't get trapped with an unfavourable loan. Here are four tips for getting the best possible mortgage.
1. Look your best as a borrower
Spiff up your credit before you borrow.
You'll score a low rate if you can convince a lender that you're low risk.
So, check your credit score and take steps to raise it, such as paying down your debts to give yourself a lower debt-to-income ratio.
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A mortgage lender wants to know it will be repaid. If you can make the lender feel comfortable, with a credit score above 700 or 750, you will get a sweeter deal.
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2. Look your best as an earner
You'll look better to a lender if you're an employee, not an entrepreneur.
It's best not to apply for a mortgage until you've had the same employer for two years or more.
Know that lenders favour borrowers who are employed by businesses, versus the self-employed and freelancers.
If you work for yourself but your spouse works for a company, you might get a much better mortgage rate if the loan is taken out only in your spouse's name.
3. Put more money down
Low-down-payment options are available, but they won't get you the best rate.
Sure, there are mortgages that require just a small down payment, sometimes as low as 5% for properties worth $500,000 or less.
But if you put down at least 20% of the cost of the home, you can land a lower interest rate.
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If your down payment is less than 20%, your interest rate may be higher and you will be required to pay for mortgage default insurance (also known as CMHC insurance), increasing your total cost.
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4. Weigh your options
Comparison-shop and look at other loan types if you want to be sure you're getting the lowest possible rate.
Shop, shop, shop around and compare rates. Don't just grab a loan from the very first company you talk to. Just make sure you don't make more than one application, since each application counts as a hard pull on your credit score.
That's why it can sometimes pay off to speak to a mortgage broker or use an online broker. Mortgage brokers are able to browse multiple rates from multiple lenders, helping you get the best deal, and your credit history only gets pulled once.
Be aware that interest rates vary across loan types. Variable-rate mortgages have lower rates than fixed-rate loans, and shorter-term mortgages beat 10-year loans.
Your mortgage interest rate is a choice that could be with you for years. Make a wise decision for maximum savings over that time.
Or better yet, get Homewise to work the market for you. This online brokerage will negotiate on your behalf with more than 30 big banks and other lenders, completely free, and it only takes five minutes to apply.
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Sarah Cunnane was formerly a staff writer at Money.ca. She is a writing and marketing professional with an Honors Bachelor's degree in English and Creative Writing from the University of Toronto.
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