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Mortgage rate options
You have lots of options when it comes to mortgage rates. It’s important that you find what will best suit your needs before committing yourself to one. To help, we have a handy table that outlines the most popular rate terms, and their risk levels.
The loan-to-value (LTV) ratio is a measure comparing your mortgage amount with the appraised value of the property. The higher your down payment, the lower your LTV ratio.
*Applicable only with an accepted offer to purchase or renewal (not applicable for pre-qualifications or refinances)
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Average Bank Posted Mortgage
Let’s time travel. Below you can see the history of bank-posted mortgage rates and where they’ve stood throughout the years.
Learn About Rates & Mortgages
Welcome to our Frequently-Asked Questions (FAQ) section, where we answer the most popular questions our nesto mortgage 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.
Understanding Today’s Best Mortgage Rates
Mortgage shopping can be confusing, especially if you’re a first-time home buyer. There are a lot of different terms and options out there, and it can be tough to know where to start. In this section, we’ll cover some of the most common questions and terms that you’ll come across when shopping for a mortgage. By the end, you should have a better understanding of the process and related terms to help you find the best mortgage rate in Canada.
What is a mortgage?
A mortgage is a loan that can be used to purchase property, which in turn acts as security for the loan. A mortgage tends to be for a large sum and is usually paid off over 25 or 30 years. Even though the property is the collateral, the borrower retains ownership of the property while they pay off their mortgage.
What is a mortgage rate?
A mortgage rate, also known as the interest rate, is the percentage of interest you’ll pay on your borrowed mortgage amount throughout the term of your mortgage. Mortgage rates can be fixed, staying the same for the term, or variable, fluctuating based on a discount from the benchmark interest rate. For variable rates, the benchmark interest rate is always the lender’s prime rate which is usually based on a premium added to the Bank of Canada (BoC) key policy interest rate.
What are today’s mortgage rates?
Currently, the best 5-year fixed mortgage rates and the best 5-year variable mortgage rates are
How often are nesto’s mortgage rates updated?
Our best rates are updated regularly, each time there is a change in the pricing of rates from capital markets. Capital markets is a broad term used for the secondary money market where buyers and sellers can exchange investments and debt instruments.
nesto is able to accomplish this thanks to our capital markets division tasked with finding the best mortgage rates for our clients, and our advanced technology which empowers us to ensure you always have the latest rate information at your fingertips. We also want to be transparent from the beginning so the rate you see is the rate you get.
How often do mortgage rates change?
Fixed rates are based on the bond market and can fluctuate more regularly, although once you have locked in your fixed rate then you’ll pay the same amount of interest throughout your term.
Variable rate discounts are based on short-term bonds known as treasury bills and sovereign debt ratios. Variable rates will fluctuate on a regular basis. Albeit, these factors remain unimportant to the borrower once they lock in their discount from their lender’s prime rate. Their rate will fluctuate as many times throughout the year that the Bank of Canada (BoC) updates its key policy overnight rate which their lender will match by changes to its prime lending rate.
Once the majority of the chartered banks follow suit on changes to their prime rate, then nesto will follow suit to match. Typically, this will happen overnight on the day that the BoC changes its key policy overnight rate.
How to Get The Best Mortgage Rate
As you begin the process of looking for your dream home, you may be wondering how you can qualify for a mortgage in today’s competitive real estate market. It is important to note that qualifying for a mortgage will depend on a number of different factors, including your current financial situation and your credit score.
Should I complete a pre-approval or a pre-qualification?
Pre-approvals and pre-qualification are both an analysis of your borrowing capacity with regard to your income, credit, conditions, downpayment, savings and net worth after the purchase is completed. They do not consider the collateral (or property) as they are assessed prior to finding a subject property. Pre-qualifications do not have a rate or discount, such as in the case of a variable rate, attached to your qualification.
A rate hold will give you peace of mind while shopping for a property in the case of a pre-approval. Pre-approvals with rate holds will cost the lender to hold the money for you at a specific rate/discount. Some lenders that offer the best rates, do not offer pre-approvals with rate holds; conversely, they offer pre-qualifications without rate holds to keep the cost to buy money down for live mortgages where clients have an accepted offer on a property.
Most lenders that offer a pre-approval with a rate hold will attach a premium to this rate which means that if you go back to that lender you will be locked into that higher rate even if rates stay down. Therefore, lenders with the best rates offer only live rates which are only available to be locked in once you have an accepted offer on a specific property. Speak to your nesto advisor to see what the best option is for you.
What is a mortgage rate hold?
Lenders will hold your rate for a set amount of time – say 60 to 180 days depending on the rate being offered. Most lenders will add a premium to the rate for holding it for a longer period of time.
From time to time lenders will advertise or offer a quick close rate for the mortgage to be funded within 45 or 60 days. The quick close rate is a special offer with a limited supply of money at that rate.
A mortgage rate hold allows a client to lock in a rate either at the pre-approval or renewal / refinance stage. Once you’re qualified, the lender will issue you a commitment to hold a rate for a fixed-rate mortgage or a discount from their prime rate for the variable-rate mortgage.
Securing a mortgage can be an overwhelming process, and it is important to understand the various features and benefits that you should look for when selecting a lender. This includes things like current market rates, an easy application process, and favourable terms and conditions that set your mortgage apart from others. By taking these common insights into account, you can better differentiate the most important ideas in order to land the best possible mortgage for your needs today.
What is the most common mortgage term length in Canada?
The most common mortgage term in Canada is 5-years and more specifically, the 5-year fixed-rate mortgage. While this isn’t always the most economical option for everyone, it has become the most popular.
A lot can happen over the course of 5-years, so take your future goals into consideration when selecting each mortgage term. If you plan to break your mortgage early, you could face some high early payout penalties, so be sure to consider short and long-term goals when you need to discuss your mortgage with an advisor.
Is a variable rate better than a fixed rate?
A variable rate mortgage has proven over time to save borrowers more money than a fixed rate. Every borrower’s current circumstances and goals are different; therefore, all current financial restraints and future considerations should be thoroughly discussed with an advisor before deciding on the mortgage that is most suitable for your situation.
With a variable mortgage, the interest rate will fluctuate depending on benchmark rates, whereas a fixed rate remains the same throughout the mortgage term. A fixed rate is beneficial for budgeting purposes and offers financial stability given that mortgage payments always remain the same.
Deciding on a variable or fixed rate is really a question of personal choice and risk appetite. We would recommend speaking with a mortgage professional to assess any material risks that may pose a concern for you over the term of your mortgage.
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.
For a first-time home buyer (FTHB) who is getting used to all their new bills related to owning a home, it is recommended that they choose a fixed rate to provide some stability during the first term of their mortgage. By making their biggest monthly obligations (mortgage, condo/maintenance/strata fees and property taxes) static amounts they can take the time to put together a financial plan and start to put aside some money towards their emergency savings.
Which Variable Rate Mortgage is more suitable for me? ARM or VRM?
There are two types of variable rate mortgages: those that have static payments and those that have variable or fluctuating payments. Static payment variable rate mortgages are more specifically called variable rate mortgages (VRM); whereas variable rate mortgages with a variable payment, where the payment adjusts with changes in the lender’s prime rate, are more accurately called adjustable rate mortgages (ARM). Commonly, they are both known as variable-rate mortgages.
While it is a personal choice if you prefer an adjustable versus a variable mortgage, your choice will be influenced by the trajectory of rates in the current market, as well as your risk appetite due to that trajectory and of course the need/use for that mortgage.
For instance, if you’re using this mortgage to purchase a rental/investment property then you may want to have a variable rate mortgage as your interest will increase and you can have more interest to write off against your rental income.
The type of variable rate mortgage that is suitable for you depends on your risk and situation. Many clients holding a mortgage for an investment property may decide to keep the interest portion of their mortgages higher than the principal portion as interest paid on mortgages for investment properties can be used to reduce the overall income taxes on the income generated.
For an investment property where the borrower’s goals, risk appetite and cash flow allow, it may be prudent to choose a VRM. In most cases where the mortgage is being used for a principal residence or their goal is to pay off the mortgage sooner, it may be wiser to choose an ARM.
How do I lock my mortgage rate?
The ability of a variable rate mortgage to be locked into a fixed rate for the duration of its term is a mortgage feature known as convertibility. Most mortgages will offer this feature but there may be restrictions from lender to lender so it is best to speak with your advisor to understand the solution that you are getting.
It is important to understand the costs and benefits before converting your mortgage. You will want to make sure that any premium you pay on the higher fixed rate is worth it for the potential downside risk with the variable rate mortgage. It is imperative to do a cost of borrowing analysis between your options prior to moving ahead. The change should make economical sense within the course of your mortgage term.
What are some mortgage features and benefits?
Taking advantage of your prepayment options, even minimally, can save you serious interest while helping pay down your mortgage faster.
The portability feature can let you transfer your mortgage to a new property should you have an unplanned need to move in the middle of your term without having to pay a penalty. This feature can come in handy if you have a large penalty to break your mortgage, or a really low rate compared to the current market that it may be worthwhile to port your rate to your new mortgage.
While not the most sought-after feature, assumability can let a buyer, when they purchase your home, take on your mortgage upon approval by your lender. In most cases, this means no penalty for you, and possibly a low rate for them if you don’t need that mortgage on your new home, or you’re moving outside of the country.
Convertibility is another valuable feature that exists on mortgages. This feature allows you to early renew your variable rate mortgage (VRM) or your adjustable-rate mortgage (ARM) at any point in your term to a fixed-rate mortgage. Depending on the lender, you may be offered different options such as renewing to a fixed rate at the remaining term only, renewing back to a 5yrs term only, or renewing to any term as long as the term remaining is not decreased.
Not all lenders will offer you all of these features on all their financing solutions. Some lenders will offer you features a la carte based on how you want them to price your mortgage rate. nesto makes it easy as we offer all these features on all of our mortgages, even our limited-feature mortgages.
Get More Than the Best Mortgage Rate
When thinking about purchasing a home, there are many steps involved in the mortgage process. In this section, we will outline those steps and provide some tips for navigating them successfully. The most important step is determining which mortgage is right for you. Taking the time to understand the various solutions and what each has to offer can ensure that you make sound decisions throughout the entire process and ultimately end up in the home of your dreams!
Should I choose the lender with the lowest rate?
The lowest rate is not always the best option for everyone. Depending on your short and long-term goals for owning your home, it may be wiser to choose the mortgage solution that works best for you. The solution that is best for you may or may not have the lowest rate option. As the mortgage rate is priced based on the risk that the borrower represents for the lender, it may be best to review the restrictions attached to the rate.
There may be restrictions that will be tied to a hefty penalty if the borrower pays out the loan prior to maturity. Restrictions can come in the form of features, benefits, and bigger penalties than the usual 3 months interest or interest rate differential.
This means that you may have to give up features such as prepayments or porting privileges when opting for the lowest-rate product. Without the ability to port, penalties on these types of lowest-rate mortgages can be quite daunting, such as a percentage of the mortgage balance at the time of payout.
Speak to one of our advisors, they can show you how to save even more with a full-feature mortgage by making some small changes to your mortgage repayment plan.
What are mortgage prepayment options?
Prepayment privileges enable you to make extra payments that go directly to pay off your principal. Prepayment options come in many forms and have different limitations based on your lender but overall if you choose to exercise them they will save you time and money so you can become mortgage free faster.
There are a number of ways you can take advantage of prepayments, including:
- Lump-sum payments – This option will come either in the form of one single lump sum up to 10%, 15%, or 20% either once in a year or once a year on the anniversary date of the mortgage; or very liberally you can make multiple lump sum payments throughout the year without exceeding the allowable amount.
- Double Up Payments – This option lets you automate the lump sum payments to double up and match your regularly scheduled payments. The savings will be exponential if you’re already on an accelerated payment plan.
- Increase regular payments – If you have any prepayment privileges with your mortgage then you will have a corresponding option for lump sum payments that will let you increase your regular payments by the same percentage on the anniversary date.
- Payment frequency – This option lets you accelerate your weekly or biweekly payment. This means, for biweekly accelerated payments that the semi-monthly payment amount is applied 26 times a year; whereas, weekly accelerated payments are just half of the semi-monthly applied 52 times a year. Although technically not considered a prepayment privilege, accelerated payments can shave off a couple of years of interest over the life of the mortgage.
Depending on the lender and the mortgage restrictions, not all prepayment privileges will be standard. Most lenders will have a full-featured mortgage that gives you all privileges and a restricted or limited-feature mortgage that gives you none of them. Some lenders will price a mortgage interest rate based on the number of features it provides, others will use an a la carte approach in pricing individually for each of their clients.
nesto has some of the most simplified features available. We give you all options on our full-feature mortgages including the ability to make a minimum lump sum for as little as $100 with any of your regularly scheduled payments.
Albeit our limited-feature mortgages, we do not give any prepayment privileges. The pricing is the same for all clients that can qualify and get either of these mortgages. We prefer to have clients discuss their short and long-term goals with our advisors so that they can be sure that the solution they are provided is suitable for their unique needs; as not all solutions are suitable for everyone.
How do I compare mortgage rates in Canada?
When comparing mortgage rates in Canada, it’s important to look at similarities and differences between the comparable types and terms. Comparisons must be made with complementary solutions, meaning a fixed rate with another fixed rate and vice versa. The mortgage term must be aligned well – compare a 5-year term with a 5-year term, and so on.
Then you have to look beyond the rate, the features, benefits and restrictions. Many low-rate mortgages have restrictions – such as pre-emptive qualifying criteria and prepayment penalties that are outside of the normal if paid off or refinanced before the end of its term. Some restrictions go as far as to inhibit the ability to payout or renew early by adding a bona fide sale clause – meaning you can’t break the mortgage except to sell the property to an unrelated party.
What Factors into My Personal Mortgage Rate in Canada?
Factors such as credit score, income, down payment and purpose of the loan – all of which play a role in determining how your mortgage rate is priced.
Mortgage rates in Canada vary depending on different factors such as the borrower’s credit, the property which is being used as collateral, the borrower’s income capacity to service the debt, the borrower’s capital in the form of savings/investments and down payment, and most importantly, conditions. Conditions such as the purpose of the loan and the loan-to-value (LTV) ratio – these two conditions will have the most impact on the rate. The mortgage rate is priced based on the risk associated with that mortgage, property and borrower.
The lowest rate is not the most important aspect of getting a mortgage that will save you the most interest. Sometimes the lowest rate is the “no frills” or “restricted” or “limited” mortgage that a lender offers, which beyond not having a high rate doesn’t have any prepayment privileges or other features such as portability or assumability.
Your mortgage term is the length of time that your mortgage agreement and mortgage rate will be in effect. Mortgage terms range from 6 months all the way up to 10 years, with 5 years being the most common term. But, just because 5 years is the most common, that doesn’t mean it’s right for you. Just like the mortgage itself, choosing the term is dependent on your needs and goals.
A mortgage term is one of the criteria that lenders use to price mortgages, so it doesn’t make sense to compare pricing based on rate alone without deliberating on the correct term that best suits your needs. We recommend that you have a mortgage assessment with your mortgage professional to truly understand what the most suitable solution is for you.
The type of mortgage you select will play a major role in your mortgage rate. Mortgage types such as adjustable, variable, fixed, open, closed, standard charge or revolving home equity lines of credit (HELOCs) under a collateral charge are all personal choices based on your unique financial planning needs.
Open vs Closed Mortgages
When looking at open versus 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.
Variable Rate Mortgages (VRM) vs Adjustable Rate Mortgages (ARM)
There are two types of variable rate mortgages, those that have static payments and those that have variable or fluctuating payments. Static payment variable rate mortgages are more specifically called variable rate mortgages (VRM); whereas variable rate mortgages with a variable payment, in which the payment adjusts with changes in the lender’s prime rate, are more accurately called adjustable rate mortgages (ARM). Commonly, they are both known as variable-rate mortgages.
Mortgage Down Payment
The size of your down payment will determine your loan-to-value (LTV) ratio and whether you must also purchase mortgage default insurance. LTV is most important to mortgage rate pricing with insured or insurable lending criteria.
Insured vs Insurable Mortgages
Insured and insurable mortgage rate pricing applies on properties valued at less than $1 million dollars and the amortization is up to 25yrs. In such cases, the lender will provide a better rate as there is a lower risk of loss to them.
The borrower would purchase the insurance on the front end in the case of an insured purchase with less than a 20% down payment. To give you a lower rate, lenders can also purchase the insurance on the back end to lower the default risk on the mortgage if your down payment is more than 20%.
An insured mortgage is qualified as such when your down payment is less than 20% therefore you will need to purchase high-ratio default insurance. Although this insurance is added to your mortgage, the taxes (PST) on the purchase of this insurance, are not.
Provincial Sales Tax on Mortgage Default Insurance
Your solicitor will collect and remit the PST on behalf of the high ratio insurer (CMHC, Sagen or Canada Guaranty) upon your closing. Once the high ratio default insurance is purchased from one of the three default insurers then the risk to the lender is reduced as the default insurance will protect them in case of default.
All things being equal, the lowest rate, in this case, will be an insured purchase or insured transfer, where default insurance was purchased with the home by the borrower.
The Cost of Default Insurance to the Lender affects your Mortgage Rate
Second, to this, there is an insurable criterion with mortgage finance companies that do not exist with large banks. If you put down 20% or more with a purchase price of less than $1 million dollars having an amortization of up to 25yrs, then your mortgage will be priced based on an insurable sliding scale – meaning the more down payment the lower the mortgage interest rate.
The second-best rate applies to purchases and renewals with 35% or more equity or down payment – meaning 65% loan-to-value (LTV) will get you the second-best mortgage rate. This is due to the fact that the lender will buy the default insurance on the back end and the cost is insignificant with 35% or more equity. The rate gets higher until the worst pricing occurs at exactly 80% LTV which is with 20% equity or down payment.
Lastly, the mortgage price is highest for an uninsured mortgage, which means that either the amortization is higher than 25yrs or the property purchase price is more than $1 million dollars. In this case, the mortgage is uninsured, which means that you cannot purchase mortgage default insurance, meaning all the risk has defaulted back to the lender. For this type of higher risk, the lender will price the mortgage rate higher than any other criteria.
If you’re buying a home that you personally intend to live in, this is considered your primary residence and will be 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. Or if you purchase a primary residence with a second separate legally registered suite then your property will be an owner-occupied rental and you’ll have access to the lowest rates as a primary residence.
The logic behind your higher rate for a mortgage on a property solely for investment purposes is, if money is tight, people will pay the mortgage on their primary residence before other obligations. As such, lenders build added risk into the rates for rental properties.
Mortgages are priced very much the same when it comes to purchases and renewals based on the loan-to-value (LTV) ratio as well as other factors that influence rates, such as if the transaction is insured or insurable.
Refinances are Uninsured Transactions
Refinances are considered uninsured transactions and therefore have higher risk attached to them. Lenders will price the higher risk accordingly based on the number of exceptions to their policy they will make in exchange for the risk that they are taking on with a specific mortgage.
Refinances can occur for many reasons. Extending your mortgage balance or amortization would be considered a refinance. Changing a mortgage covenant, such as adding or removing someone from the property’s land title, would be considered a refinance. Adding a HELOC by changing the registered charge on the property would be considered a refinance. Combining a HELOC and mortgage that are separately mortgaged on the same property’s title but with different lenders will be considered a refinance. Combining two separately registered collateral charges on the same property may be considered a refinance. Transferring a mortgage to a prime (A) lender from an alternative (B or private) lender will be considered a refinance.
Converting or Transferring a Mortgage
Mortgage conversion and porting are two other types of transactions that are priced without simple straightforward rules. When you convert a variable mortgage, either VRM or ARM, into a fixed-rate mortgage it is called conversion, also known as an early renewal.
The lender will not give any discounts on their posted rates, if you convert your variable mortgage into a fixed rate mortgage, as they would for acquiring new business. As well any term remaining which is less than 5yrs may be converted to keep the remaining term the same or increase the term back to 5yrs. This same logic applies to the early renewal of a fixed-rate mortgage.
With mortgage portability, a lender will give you 30 to 90 days to transfer your mortgage to a new property from the time it is paid out at the sale of the current property. Once the new mortgage is closed with the transfer of your current rate, the lender will refund the prepayment penalty.
If the required mortgage that you need is higher than the balance you paid out on the old mortgage then the lender will have to provide you with a weighted average rate. In this case, the new rate is weighted with regard to the balances based on the old rate, the mortgage that was paid out and ported, and the new rate based on current prevailing market rates.
On the prime lending side, the amortization period cannot exceed 30yrs. The maximum allowable amortization is 25 years on mortgages with less than a 20% down payment, or equity in the property at the time of renewal. You can go up to 30yrs amortization on mortgages with down payments of 20%, or more.
The longer the amortization, the lower your mortgage payment. The shorter your amortization period, the more money you save on interest over the term or life of the loan. The difference between two identical mortgages with different amortizations is the interest-carrying cost for the extended time the money is lent out.
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There are multiple credit rating agencies and different types of scoring systems. The main two credit agencies that are prevalent in Canada are Equifax and TransUnion. They both provide different types of credit scores, one of which is the 3 years running score, which is also known as a soft credit check.
Both agencies will also provide a hard credit score which is the whole life score for a borrower. The scoring is based on a total out of 900. The hard credit score from Equifax, specifically known as FICO (previously called Beacon), is the credit scoring method that is used by mortgage lenders and professionals. FICO stands for Fair Isaac & Co, aptly named after the company that developed that scoring system.
Hard Credit Checks
A hard credit check on your credit bureau does not reduce your credit score right away. The credit rating agency will know who is pulling your credit score and for what reason. Multiple mortgage brokers or lenders completing hard credit checks within a 45-day period will be grouped as only one credit hit by the credit rating agency. There will be some credit rating points deducted from your credit score but they will be reinstated with your timely bill payments over the course of a few quarters.
Soft Credit Checks
Soft credit checks do not affect your credit score and they are great for planning but don’t offer much assurance to a lender underwriting your mortgage application. At some point, the lender or broker will need to pull your FICO score to make sure you meet their requirements; as well as to check back on your full repayment history.
Lenders have a specific minimum FICO score requirement of 680 or 720 out of 900 to provide you with the best mortgage rate. Lenders will not want missed payments, especially for mortgage payments as it will show to the lender either you have poor budgeting or cash flow, or your monthly obligations and carrying costs exceed your income. Lenders and brokers will want to know if you put any practices in place to avoid any negative habits in the future.
Minimum Credit Requirement
The best rates, such as nesto’s, are reserved for borrowers who have a FICO score of 680+ and no missed payments on mortgages. Exceptions can be made in some circumstances such as missed payments due to separation. During a separation, neither party was able to take responsibility for all the household payments and due to unforeseen circumstances, the mortgage may have been neglected.
There is always a story and nesto mortgage advisors are willing to listen and understand the full story behind your credit report. If there is a reasonable explanation for missed payments then the advisor will put a case together to ask for exceptions from the underwriting department on your behalf.
The stability of your income shows your capacity to carry the mortgage and any other debts that are showing up as facilities on your credit bureau report. Your income must be established past the probationary period if your employment is new. It is not advisable to change employers in the middle of your mortgage financing. Lenders will use a two-year average on any non-guaranteed income such as hourly, bonus, overtime, contract or self-employed income.
Types of Income
On the A or Prime lending side, lenders can use your taxed income but any forms of income that are not taxed will not be considered. Upon exception, up to 70% of non-taxed income could be used for qualification. If you change industries and don’t have two years of average income to work with then the lender may average your year-to-date received income over two years to get a conservative value.
Lenders will ask for various documents to satisfy their risk assessment. The main documents that borrowers may need to provide are paystubs, letters of employment, and T4s if they are employed. At a minimum Business Registration or Articles of Incorporation, Notice of Assessments (NOAs), T1 Generals and 3 months of business/corporate/individual bank account histories are required for self-employed or incorporated individuals.
Mortgage Stress Test
After the Great Recession in 2007, due to the mortgage market fallout in the US, the international community agreed to and mandated a set of mortgage underwriting guidelines to protect the world’s real estate. These rules are known as the B-20 Guidelines, mandated and legislated by the Office of the Superintendent of Financial Services (OFSI) in Canada.
As of October 2016, these guidelines slowly became different aspects of mandated rules governing prime mortgages in Canada. Canada already had rigorous mandates for its mortgage lenders so our real estate was unaffected by the fallout that took place south of the border.
One of the aspects of these guidelines is the mortgage stress test with its first rule being implemented in October 2016. If you arranged your mortgage prior to October 2016 and have not refinanced it then you will not be impacted in the same way by the stress test when you renew your mortgage with another lender.
Passing the Stress Test
You’ll need to pass a stress test to qualify for a mortgage on the prime A lending side if you want the best rate. You will need to prove you can afford payments at a qualifying interest rate typically higher than the actual rate in your mortgage contract.
You will need to pass this stress test whether you require mortgage default insurance or not. Provincially regulated credit unions are not required to qualify all mortgages on the stress test; however, they will use a higher rate of interest as they will not have access to prime lending rates on those types of mortgage solutions.
Federally regulated lenders such as mortgage finance companies and banks must use the higher interest rate of either:
- the contracted interest rate plus 2%
On variable rate mortgages, both VRM and ARM, the rate you lock in during a pre-approval can change with the change to the lender’s prime rate. Indeed, the variable mortgage rate hold is actually a discount, which is being held from the lender’s prime rate which fluctuates with the BoC’s Key Overnight Policy Rate.
If you already have a mortgage, you’ll need to pass this stress test if you:
- refinance (refi) your home for equity take out (ETO)
- renew by transferring or switching to a new lender, or
- take out a home equity line of credit
Mortgage Lending Ratios
Mortgage lending ratios are known as Gross Debt Service Ratio (GDSR) and Total Debt Service Ratio (TDSR). As the names suggest, GDSR calculates the household debt carrying capacity against an applicant’s qualified income and TDSR calculates the total debt carrying capacity against a borrower’s income. On joint applications ratios for qualifying are combined debt payments and incomes in the case of multiple borrowers.
Typically, insured or insurable transactions, where the purchase price or assessed value is under $1M and the mortgage amortization is up to 25yrs, will lend up to 39% on GDSR and 44% on TDSR. There are lenders that will use different ratios due to their risk appetites.
Uninsured transactions are classified as purchases or renewals where a property is valued for more than $1M or the amortization will be more than 25yrs or the transaction is a refinance – where equity is taken out or time is being extended.
In the case of uninsured transactions, lenders will have their own risk assessment criteria to use whatever ratios they feel comfortable with based on the client’s unique situation. The lender can qualify the ratios and mortgage rate pricing on the file’s risk profile and lender’s risk appetite. The money they use to fund uninsured mortgages comes from their own sources – instead of Canada’s mortgage bond market with its own set of strict qualifying rules.
Calculating Debt Service Ratios
GDSR = (Mortgage Payment + Property Taxes + Condo Fees/2 + Hydro)/Income
TDSR = (All debts in GDSR calculation + all other debts) / Income
Initially, newer lenders will offer the best rates as they have to prove, to the regulators and their investors, their files are impeccable. As they fund more mortgages, their risk appetite will increase and they will provide more exceptions on income and lending ratios, which may affect mortgage rate pricing on individually qualified files.
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 mortgage qualifying rate and is set by the Bank of Canada and administered by OFSI. 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
Mortgage Finance Companies, Mortgage Investment Corporations, Credit Unions, Banks and other Federally Regulated Financial Institutions are all different types of lenders who offer mortgages and underwrite loans.
Lenders will have different channels – some will have branches and brokers that they offer their services through; while others will be direct to consumers to avoid the need to give commissions to external salespeople and pass the savings directly to their consumers.
You will need to be aware of which channel you’re working with as pricing can be different in various channels due to the need for the lender to compensate the salesperson. You’ll also need to understand how the salesperson is being paid and how it affects your mortgage rate.
Mortgage Agents and Brokers
It is recommended that you work with a qualified mortgage professional when arranging your mortgage. A qualified mortgage professional, unlike a banking advisor who is a generalist, specializes in mortgages and as such can provide you with in-depth process insight and knowledge as you go through the application and qualification process.
A qualified mortgage professional can come with various names depending on the province that they are registered in: agent, broker, sub-mortgage broker, salesperson or mortgage associate. However, they can provide the same services, must meet the same educational requirements and be provincially regulated. Some provinces, such as Quebec with its prime directive to protect consumer interests at each stage of the process, have more rigorous education and regulations than all other provinces.
At nesto, all of our mortgage advisors hold mortgage professional designations from one or more provinces concurrently. We believe that our clients will receive the best advice and care when they speak with specialists that exceed the industry status quo. Does your mortgage professional have a mortgage licence?
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