When you are shopping for the home of your dreams, it is important to decide if you want a fixed mortgage or variable rates. With a fixed mortgage rate, you have the option to lock in at a predetermined rate for a set period of time. The most common lock-in rate is 5 years, but they can last all the way up to 25 years.
Benefits of a fixed mortgage rate:
Downsides of a fixed mortgage rate:
A variable mortgage rate is all based on the lender’s prime rate. This rate is all dependent on the current economic conditions and is just a benchmark rate that is utilized by many banks when they are involved in pricing out loans that are short term. From month to month, prime can go up or down, which results in the variable mortgage rate also going up or down.
Benefits of a variable mortgage rate:
Downsides of a variable mortgage rate:
Don’t forget to calculate exactly how much you can afford before you start looking for a dream home, which is why we suggest using the affordability calculator at bestmortgagerates4u.ca
After knowing your ideal monthly return, you’ll know how much you’ll need to pay down. Saving up income for a down payment is an important part of the process of purchasing a home. The amount of your down payment will influence how much you qualify for a mortgage. The minimum down payment in Canada is 5 percent on the first home price of $500,000, and 10 percent on any portion that exceeds $500,000, up to $1 million. A home priced above $1 million requires a minimum of at least 20 percent down.
One stipulation that buyers need to be aware of is that they have to buy mortgage default insurance when they put down less than 20 percent of their home’s price. If you can put more than 20 percent of your home purchase down, you will be eligible for a conventional mortgage product from your lender. If not, expect to pay an additional premium of 0.50–2.75% of the mortgage value, depending on your loan-to-value ratio (LTV) and amortization period.
The additional costs that come after the offer has been accepted are part of the affordability that normally does not spring to mind when you start looking for a home. The price of things can really add up fast. From the closing costs and property taxes to the overall cost of living, purchasing a home isn’t cheap!
With their mortgage needs, prospective home buyers may turn to their bank or mortgage broker, but many people aren’t even sure what to look for or what would be the most appropriate service for their needs.
When it comes to negotiations, by going to the bank, home buyers go straight to a lender and behind the wheel. When you decide to work with your bank, all of the services are combined with a company you have worked with and trusted, and you may be eligible for discounts.
On the other hand, a broker gives home buyers the advantage of having access to a number of discounts provided by various lenders and they do the research and negotiate for you to secure the best price and terms offered on the market.
In a lot of cases, brokers will not always offer the same rates as the banks, hence we provide very comprehensive mortgage rate comparisons in Canada. We compare different brokers, banks, credit unions, and other lenders.
In addition to many of the other Big 6 Banks, RBC sets Canada’s benchmark prime rate. When the Bank of Canada changes its overnight rate, then RBC will alter its benchmark prime rate based on that. RBC is known as the leader in setting the country’s prime rate. Other lenders will usually follow suit after RBC.
Like almost all rates, it is possible to negotiate the mortgage rates. The first-rate offered by any bank should never be accepted by mortgage shoppers.
Be sure to compare mortgage rates with other lenders for other comparable terms, features, and conditions in order to be in a better position to negotiate.
Remember that those bank specialists will want your business and in most cases, are willing to come down on their rates in order to secure that business. (That means, of course, that you are well qualified.)
If you are sitting down with a broker that simply won’t budge, then just find another one. Bank reps at different places will all quote different rates and if nothing seems to work, then just tell them that you’re going to switch your mortgage to a new lender and tell them your deadline for getting back to you with their final offer.
The amortization period refers to the whole length of the mortgage, whether it is a short-term or long-term mortgage. Most of the mortgages are usually negotiated over a span of 25 years. There will be a set of negotiated conditions for a number of years during those 25 years. The most typical mortgage term duration is five years, which just means that you are paying the principal and interest for five years at a negotiated price, and then negotiating another five-year term after that.
The credit score is crucial because it’s the determining factor on if you will get pre-approved and what you get pre-approved for. Lenders want to trust that you are going to repay your loans, and they consider the following factors very carefully: payment history, accumulated debt, age of credit history, applying for new credit too often, and the sort of debt you are looking for (long-term debt vs. short-term debt).
The interest rate will be expressed as the prime rate, plus or minus a certain percentage point when you receive a variable mortgage from a bank. An example of this is that if the prime rate is 3.00%, and your mortgage rate is prime minus 0.50%, your mortgage rate is 2.50%.
So, if a bank changes its prime rate, it would increase your mortgage rate by the same amount. For example, if the prime rate goes up to 3.25%, the mortgage rate will increase to 2.75%.
This rule does not apply to fixed mortgage rates. When you accept a fixed-rate loan, the mortgage rate will not adjust over the whole duration of the term. If rates go up, it mitigates your risk, because your price will not increase. However, you won’t enjoy the added benefit if the rates go down. Fixed rates are better if you think mortgage rates are going to increase, or if you want the added security in knowing exactly which price you’re going to pay regardless of what’s going on in the market.
You might have observed that there is a considerable difference between the rates of many banks. An example of this is you might see a TD mortgage rate with a 5-year fixed term 0.5% lower than the BMO mortgage rates today in the same category. The discrepancy is often a normal pricing strategy focused on target market share, marketing, and competition policies.
The interest rate will be calculated as the Scotiabank prime rate, plus or minus a certain percentage point when you obtain a variable mortgage from the Scotiabank. For instance, if the Scotiabank prime rate is 3.00%, and your mortgage rate is prime minus 0.50%, your mortgage rate would be 2.50%.
If Scotiabank changed its prime rate, it would increase your mortgage rate by the same amount. For example, if the prime rate of the Scotiabank was elevated to 3.25%, the mortgage rate will increase to 2.75%.
The rule does not apply to fixed mortgage rates. When you accept a fixed-rate mortgage, the mortgage rate will not adjust over the entire term. In the event rates go up, this mitigates your risk because your rate will not increase. When rates go down though, you will not reap the added benefit. Fixed rates are better if you think mortgage rates are going to increase, or if you want security in knowing exactly what you’re going to be paying regardless of what’s going on in the market.
You will want to see what the difference will be between choosing accelerated biweekly or monthly mortgage payments as you develop your monthly budget. The best way to see the effect of adjusting the frequency of your payments is by comparing the total interest paid on the mortgage with the two situations.
Suppose the home you want to buy is $500,000 and you make a down payment of 5 percent. The overall mortgage cost will be $492,100 (because you will have to pay $17,100 in mortgage insurance) and you have selected an amortization period of 25 years.
When you qualify for the current five-year fixed rate of 4.49 percent with Scotiabank and make the applicable monthly payments, you will be paying interest of $324,172 over the duration of the mortgage (this assumes that your interest rate stays the same amount over the entire amortization period).
However, you must pay $275,076 in interest if you make regular bi-weekly payments. This translates to savings of $49,096. You will also be able to pay off your mortgage three years earlier. Therefore, the accelerated bi-weekly option provides you with the most savings if your budget allows for monthly or accelerated bi-weekly payments.
The fastest and most efficient way to reduce your mortgage payment and the overall amount of interest paid is to get the best mortgage rate you can find. By lowering your mortgage payments, you will be able to allocate more funds to other expenses or savings. Let’s use the same example from above (a $500,000 home with a 5 percent down payment and a 25-year amortization period) to look at the impact of mortgage rates, but instead, compare how the lowest rate on the market would affect your monthly payment.
With the five-year fixed rate of 4.49 percent from Scotiabank, your monthly mortgage payment will be $2,721 and over 25 years you will pay $324,172 in total interest. However, if you manage to get the lowest fixed rate on the market for five years (2.14 percent as of November 16), the monthly payment will be $2,117 and the total interest amount you pay will be $143,059. As a result, you’ll save a monthly amount of $604 and an interest amount of $181,113.
This example emphasizes the importance of shopping around for comparisons on mortgage rates. It is important to keep in mind that the posted rate of a bank is usually much higher than the rate for which you are going to qualify. When you call Scotiabank looking around for rates, you will, in most cases, be offered a lower rate that is closer to that of the best current market rate.
Consider getting a mortgage broker to help you go through your comparison shopping. A mortgage broker will assist you in finding the lowest rates on the market by kind of acting like an intermediary between you and potential lenders. He or she can compare several different prices at once and even pass on volume discounts to you.