Explaining the Mortgage Rate Game
As mortgage Brokers we get to discuss mortgage rates daily and to be honest trying to explain why one rate is different from another based on the type of mortgage, amortization, etc. can become repetitive over time however I do realize 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 of the mortgage product it is attached to. 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 than 20% down payment and so 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 than 25 years.
An 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. 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 5-year insured mortgage rates are between 1.69% and 1.79% on a fixed and 1.65% to 1.75% on a variable. There is also No Frill insured mortgages available where one can get another 10bps reduction 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 sell the property or a higher penalty 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. If the rate quote is lower than the traditional discount rate then there is a good chance it is a No Frill mortgage product. Not everyone discloses that upfront so ask.
Non-Insured mortgages (sometimes called conventional mortgages) are mortgages that have a purchase price of over $1,000,000.00, or a refinance (adding more money to the mortgage, taking out a secured line of credit, or 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 this mortgage cannot be insured. The benefits of non-insured mortgages are that you can extend the amortization to 30 years to keep your payment lower or qualify for more borrowing and you can take out equity or consolidate debt. Mortgage rates for 5-year non-insured mortgages are in the 1.99% to 2.04% range for fixed and 1.85% to 1.95% for the variable.
So, as you can see there is a spread between insured and non-insured mortgage rates. If you are purchasing for over $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 1.79% or lower is not relevant 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 and require at least 20% down payment if purchasing or over 20% equity if refinancing.
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 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, this will suit your overall monthly cash flow which is the most important thing to you right now. You can always change things up later on.