Find the Best Mortgage Rates in Canada

 

Learn About Rates & Mortgages

Welcome to our Frequently-Asked Questions (FAQ) section, where we answer the most popular questions our nesto advisors receive on a daily basis, designed to help you make informed mortgage decisions every time you need a new mortgage or to renew/refinance an existing one.

How to Navigate Mortgage Rates in Canada

What Factors into My Personal Mortgage Rate in Canada?

Factors such as credit score and income play a big part in qualifying for the lowest interest rate. The riskier a borrower appears, the higher the interest rate can be. Rate is definitely not the most important aspect of a mortgage, however, as many rock-bottom rates often come from no-frills mortgage products. In other words, even if a borrower qualifies for the lowest rate, they must often give up other features such as prepayments and porting privileges when opting for the lowest-rate product.

There are many other ways to save money over the mortgage term instead of taking the lowest rate, including rounding up mortgage payments or making lumpsum payments when bonuses, etc are received throughout the year. It’s important, however, not to exceed the allowable limit on annual extra payments with your lender.

Mortgage Term Length

Your mortgage term is the length of time you’ve committed to remain in that product as outlined in your contract. Mortgage terms range from six months all the way up to 10 years, with five years being the most common term. But, just because five years is the most common, that doesn’t mean it’s right for you. If you don’t plan to stay in your current home for the next five years, for instance, don’t select a five-year term as you’ll have to pay a penalty to break your mortgage early.

Lenders price mortgages based on the length of term you select, so it doesn’t make sense to compare pricing based on rate alone without looking at the term length as well.

The Type of Mortgage

The type of mortgage you select – such as variable vs fixed and open vs closed – will play a role in your mortgage rate. Each selection is a personal choice based on a number of factors.

When looking at open vs closed mortgages, for instance, it’s important to note that open mortgages are priced higher because of the flexibility they offer to pay the mortgage off at any time without facing a penalty.

And while variable mortgages have proven to be more cost effective over time than fixed mortgages, some people prefer the certainty of having the same payment throughout the mortgage term as is the case with fixed mortgages.

Your Mortgage Down Payment

The size of your down payment will determine whether you must also pay mortgage default insurance in addition to your regular mortgage payments. Mortgage default insurance is required any time you may a down payment that’s less than 20% of the property’s value.

How You Use Your Property

If you’re buying a home that you personally intend to live in, this is considered your primary residence and is known as owner occupied. If you’re buying an investment property that you intend to rent to others, you’ll pay higher interest rates than on your primary residence. The logic behind this is that people will pay the mortgage on their primary residence before any rental properties. As such, lenders build added risk into the rates for rental properties.

Your Amortization Period

If you select a longer amortization period (the maximum is 25 years on mortgages with less than a 20% down payment and 30 years on mortgages with down payments of 20% or higher), your individual mortgage payment will be lower because they’re spread out over a longer period of time. Longer amortizations can come equipped with higher interest rates. You’ll also pay more interest the longer you take to pay off your mortgage.

Learn About Different Types of Mortgages in Canada

Open Mortgages vs Closed Mortgages

With an open mortgage, you’re able to prepay any amount of your mortgage at any time without facing a prepayment 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 a closed 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 prepayment 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 prepayment 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 prepayment penalty. It’s important, therefore, to be aware of your limits and stay within them.

Variable Mortgage Rates vs Fixed Mortgage Rates

A variable-rate mortgage fluctuates with the nesto’s prime rate throughout your mortgage term. While your mortgage payment will remain the same throughout your term, your interest rate may change based on market conditions. So, if the prime rate rises or falls, this impacts the amount of principal you pay off each month. When rates on variable-rate 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.

A fixed-rate mortgage keeps your interest rate steady over the term of your mortgage. Historically, variable rates have paid off for Canadians over time, as a variable-rate mortgage often allows you to take advantage of lower rates as the interest rate is calculated on an ongoing basis at a lender’s prime rate minus a set percentage. Still, many conservative borrowers would rather pay more for the security of a fixed rate option than have to worry about the fluctuation of a variate rate alternative.

There’s no doubt that the five-year fixed-rate mortgage is the most common choice selected by Canadian homeowners. But, this isn’t the best option for everyone, regardless of its popularity. Your decision should be based on your tolerance for risk as well as your ability to withstand increases in mortgage payments. This is where our expert support is even more invaluable.

What do I need to qualify for a mortgage in Canada?

A good credit score

The ideal candidate for a traditional mortgage lender has a credit score that’s 680 and above. The higher the score is above 700 the better – with a maximum score of 900 possible – as borrowers will qualify for the lowest rates. There are options available for people with lower scores as well, but you can expect rates to be higher and terms to be shorter in these circumstances. nesto has strict lending guidelines that require a minimum credit score and no recent missed payments.

Submit your proof of income

If you can prove your income through paystubs and/or your annual tax return notice of assessment (NOA), lenders look upon you more favourably than if you’re self-employed and can’t prove income as easily. As such, if you have a full-time job with an employer, you’ll generally pay lower interest rates than someone who’s in business for themselves and can’t easily prove income, which makes them riskier in the eyes of lenders.

Pass a mortgage stress test

You must also pass a mortgage stress test in order to be eligible for a certain mortgage amount. This stress test is essentially insurance that you’ll still be able to afford your mortgage payments if interest rates rise. This higher rate is known as the qualifying rate and is set by the Bank of Canada. All mortgage applications are subject to stress testing using the higher qualifying rate between the BoC’s five-year benchmark rate or the contractual mortgage rate (offered by your lender) plus 2%.

Choosing Between a Mortgage Broker vs a Mortgage Lender

A mortgage broker (also known as a mortgage agent, associate, salesperson, etc depending on the province in which they operate) is a licensed professional who can negotiate the best mortgage by comparing all the offerings from multiple lenders, including banks, credit unions and trust companies, as well as alternative and private funding specialists. In other words, the mortgage broker acts as an intermediary between the borrower and the lender.

A mortgage lender is one financial institution that offers a single line of mortgage products direct to borrowers. The lender’s mortgage specialists only have access to their own mortgage products.

As a lender, nesto makes less than the average broker or mortgage specialist, but we get the peace of mind knowing that we helped you save thousands of dollars on your mortgage.