If you’re looking to buy a home, the current real estate environment can be very daunting.Between the pandemic, rising inflation, and the housing crisis, becoming a homeowner seemsmore unattainable than ever. In this article, you will find an overview of…
Selecting a mortgage rate and product that’s right for you involves a lot of background work based on your short- and long-term needs, financial state and credit situation, to name just a few factors. That’s why nesto has compiled this Mortgage Rate Guide to help you navigate the ins and outs of what goes into the mortgage selection process – and answer all your questions along the way.
- Having a ‘fixed’ rate means that your rate will remain the same over the term of your mortgage (one, three, five… years)
- A variable-rate mortgage fluctuates with the lender’s prime rate throughout your mortgage term. So, while your mortgage payment will remain the same throughout your term, your interest rate may change based on market conditions
- Knowing what factors work together to determine your mortgage rate can help you better understand the process. The rate you’re offered is based on a number of considerations that are unique to you
Estimate your mortgage affordability
When searching for a home, one of the first steps to take is figuring out how much mortgage you can afford. This is known as mortgage affordability.
Representing the maximum price you could pay for a house and the corresponding mortgage, mortgage affordability is primarily based on your income, monthly expenses and the expenses associated with owning a home. It’s an essential step in the mortgage process as it provides a clear picture of whether you can comfortably afford your mortgage payments. An assessment of your capacity to afford a house will also help you find the home in the right price range to fit your budget.
Tip: The easiest way to determine your mortgage affordability and the maximum price for which you qualify, is through nesto’s Mortgage Affordability Calculator.
Determine your savings requirement
Saving for the down payment on your first home requires diligence and patience, but it’s well worth the effort as taking the plunge into homeownership is both rewarding and financially satisfying when you begin building equity and wealth in your own property.
Tip: There are numerous down payment options available today to help get you into a home sooner.
The minimum down payment when buying a home in Canada is 5% of the purchase price for a home valued at $500,000 or less and 10% for the portion of the purchase price above $500,000. See: How Much Do You Need for a Down Payment in Canada?
Beginning your home journey?
Start with a low rate.
Chat with a nesto expert today, commission-free, and secure your rate.
Do you need a one, three, five… year mortgage?
Currently, nearly 70% of home buyers in Canada have a fixed mortgage rate. And, more than 60% chose 5 years as the renewal term for their mortgage.
Having a ‘fixed’ rate means that your rate will remain the same over the term of your mortgage.
The ‘term’ refers to the duration of your current rate, whereas your ‘amortization’ is the length of time it will take to completely pay off your mortgage.
Although the 5-year fixed-rate option is undoubtedly the most common choice selected by Canadian homeowners, this isn’t always the best choice for everyone. Your decision should be based on your risk tolerance as well as your ability to withstand increases in mortgage payments. This is where our expert support is even more invaluable.
A variable-rate mortgage fluctuates with the lender’s prime rate throughout your mortgage term. So, while your variable-mortgage payment will remain the same throughout your term, your interest rate may change based on market conditions. If the prime rate rises or falls, this impacts the amount of principal you pay off each month. When rates on variable mortgages drop, more of your payment is applied to your principal balance. And, conversely, if rates increase, more of your payment will go towards the interest portion of your mortgage.
The most popular variable-mortgage terms are 3 year and 5 year, although they’re available in all increments from 1 to 5 years, with some lenders offering longer terms as well. See: Should I Get a Fixed or Variable Mortgage Rate
When selecting a term length you have to weigh a few factors, including how long rates are going to stay low or high and the duration of time you plan to stay in your home. Breaking your mortgage early can lead to some hefty early payout penalties. See: Breaking Your Mortgage Can Cost Tens of Thousands of Dollars, But an Alternative Exists!
Find the right type of mortgage
In addition to selecting a fixed or variable mortgage and the length of your mortgage term – one-10 years (see above), you’ll have to decide if you want an open or closed mortgage and special features such as pre-payment privileges.
With an open mortgage, you’re able to pre-pay any amount of your mortgage at any time without facing a pre-payment penalty. The compromise for having an open mortgage is that interest rates are higher to make up for the flexibility of being able to pay it off at any time.
With a closed mortgage, on the other hand, the interest rate is more attractive than an open mortgage because you’re limited by how much extra you can pay towards your mortgage each year. So, the compromise here is that you’ll face a pre-payment limit. This means that you’re only permitted to pay a certain percentage of your original or current balance per year – often 15%, on average, but this varies between lenders. If you have the choice, be sure to always opt for the original balance pre-payment option as it will enable you to pay off more in a year. And if you choose to pay more than your annual limit, you’ll receive a pre-payment penalty. It’s important, therefore, to be aware of your limits and stay within them.
Pre-payment privilege is a great option to have because every dollar you pay towards the principal balance of your mortgage reduces the overall interest you’ll pay. This can shave a lot of time off the number of years it’ll take you to become mortgage free.
There are a number of ways you can take advantage of pre-payments, including:
- Lump-sum payments – Use work bonuses, inheritances or extra savings to your advantage
- Payment schedule – Switch your payment frequency to accelerated bi-weekly mortgage payments. With this option, you’re making one additional monthly payment per year, which can really add up over time
- Increase regular payments – Rounding up your regular mortgage payments even a few dollars each cycle can help your balance decline sooner
Understand mortgage interest rates
Borrowers qualify for different mortgage rates based on criteria lenders use to measure risk when loaning you money for a mortgage as well as specifics surrounding loan amounts and product offerings.
Knowing what factors work together to determine your mortgage rate can help you better understand the process. The rate you’re offered is based on a number of considerations that are unique to you, including:
- Loan Amount
- Credit History & Score
- Down Payment
- Debt-to-Income Ratio
- Mortgage Type (ie, fixed vs variable)
- Mortgage Term (eg, one-year, three-year, five-year…)
To ensure you qualify for the best possible rate, it’s important to make yourself as attractive as possible in the eyes of lenders. Ensure that your credit score is high, save as much as possible for a down payment and reduce your existing debt. See: How to Get the Best Mortgage Rate
Browse mortgages with nesto
It’s our mission to find you the very best mortgage rate upfront after we compare all the lenders’ offerings. That’s right! Thanks to our advanced technology, we’re able to evaluate the whole market in seconds to find the most affordable mortgage while our commission-free experts provide you with unbiased support throughout the process.
At nesto, we offer all the help of a mortgage broker, without the commission. Simply put, our salaried mortgage advisors are rewarded based on your satisfaction. We’re here to help you reach your goal and guide you through the complicated world of home financing. #yesyoucan #empowermentisthenewsexy
Every mortgage professional knows the market’s best rates every time they check their email. Only a few of them will give you that rate without making you work for it. nesto’s here to change the industry for this very reason. You always get the best rate upfront with nesto.
Read all the articles in this guide
- Mortgage Terms in Canada
- Should I get a Fixed or Variable Mortgage Rate?
- Mortgage Prepayment
- Porting and Assuming Home Loans in Canada
- Skipping a Mortgage Payment
- What is a Cash Back Mortgage?
- Prime Interest Rate in Canada
- What is a Collateral Charge Mortgage?
Ready to get started?
In just a few clicks you can see our current rates. Then apply for your mortgage online in minutes!
in this series Mortgage 101
Table of contents
Lock in your mortgage rate for 150 days
Lock in your rate today
Related articles in: Guides
Fixed vs Variable Mortgage Rates: An Updated 2023 Guide
Key Highlights Rate increases take up to a year to fully impact the economy Inflation can be persistent if rates are not increased Shorter-term fixed rates good option if borrowers believe that BoC has been effective in its fight to…
Should I Retire with a Mortgage in Canada?
Today’s seniors don’t have it as easy as generations before them. Yes, it is true that our advancements in medicine and technology have improved the quality of life. However, these have not reduced financial burdens; on the contrary, us living…