Why RATE isn't Everything...

The most common question we get as Mortgage Brokers is - "What is the best rate you can get for me?"

The answer is RARELY simple! And if you're "rate shopping" without considering all factors, you may regret it over your mortgage term

What factors determine what rate you're eligible for?

Is it Insured (less than 20% down), or Conventional?

Insured mortgages have an insurance premium that is paid by the borrower (added to the total mortgage amount) which protects the Lender in the event that you default on your mortgage insurace.
This decreases the preceived risk for the Lender, so they are more inclined to offer you a lower rate on your mortgage.
However - insured mortgages have more stringent qualification criteria, and can only be amortized over a maximum of 25yrs

What is your Credit Score?

Most Lenders have a minimum credit score requirement to obtain a mortgage, and this requirement can vary depending on if it is an owner occupied or rental purchase.
Lenders will not only look at the credit score itself, but the reason the credit score may be decreased - ie, high utilization of credit, minimal credit history, collections, etc and then decide on if the will provide a mortgage to the client

If Conventional, are you choosing a 25yr or 30yr AM?

A lower rate at 25yrs vs a slightly higher rate at 30yrs still comes out to be a higher monthly payment cost
Qualification may be more difficult with the 25yr AM, as the shorter AM will affect the ebt servicing ratios

There are strategies where you can take a 30yr AM and untilize pre-payment privileges to reduce your outstanding AM quickly while keeping your base monthly payment low and still saving interest

Purchases

Are you trying to make any changes such as access equity or extend out your Amortization?

If you are accessing equity out of your home, this would be classified as a Refinance, and would void any default insurance you may have on your mortgage.
Extending out AM back to 25yrs can keep your insurability intact in select cases, but typically AM has to stay the same on an insurable switch/transfer
Any AM extension past 25yrs automatically breaks insurability and is considered a "refinance", even if no equity is accessed

There is an exception to maintaing Insurability & accessing equity when changing lenders - Ask me How!

Refinances & Switch/Transfers
(all of the considerations on for purchases, plus some more!)

Why Rate shouldn't be the only Consideration - Product matters too!

Most rates offered by lenders are within 0.05% to 0.2% of each other when you're shopping for mortgages, but the lowest rate may not always be the best option for YOU

Here are some points to consider before comitting to a new mortgage:

If Conventional, are you choosing a 25yr or 30yr AM?

A lower rate at 25yrs vs a slightly higher rate at 30yrs still comes out to be a higher monthly payment cost
Qualification may be more difficult with the 25yr AM, as the shorter AM will affect the ebt servicing ratios

Is it a Rental Property?

Rental properties often have higher rates as they are considered riskier to a lender
There is a higher chance of damage to a rental property, and a higher chance of missed payment or default over someone's primary home

What is your Credit Score?

Most Lenders have a minimum credit score requirement to obtain a mortgage, and this requirement can vary depending on if it is an owner occupied or rental purchase.
Lenders will not only look at the credit score itself, but the reason the credit score may be decreased - ie, high utilization of credit, minimal credit history, collections, etc and then decide on if the will provide a mortgage to the client

Is there a chance that you might break your mortgage before your term is up?

This is a topic that should be discussed with your broker, as Lender choice and rate type should be considered carefully if there's a chance you might break your mortgage term.
Statistics show that 3 out of 5 mortgage terms are broken early. Maybe your family grows and you need to upsize, maybe you are relocated for work, maybe you need to refinance and access equity for a reno or debt consolidation, may you go through a separation...there are many reasons to need to break your mortgage term

Is the Mortgage Portable?

Most mortgages ARE portable, but there are a few lenders that don't offer this option.
There are generally strict porting rules and blended rate calculations that can have it make more sense to just get a new mortgage entirely

How are the penalties calculated?

For fixed mortgages, the penalty calcualtion is usually based on an IRD (Interest Rate Differential) calculation of the interest rate you curerntly have, versus what the lender is currently offering. If your rate is higher than the current offerings, you will owe a larger penalty.
Lenders also calculate the IRD differently, as some use your contract rate (monolines and some credit unions), and others like the big banks, use the posted rate and discount you received, which results in a much higher penalty calculation
In this situation, maybe it would be better to consider a variable rate where the penalty calculation is only ever 3 month's interest. Or if you prefer the security of a fixed rate, maybe a shorter term of 2 or 3 years would give you more flexibility and allow you to avoid a larger penalty

Is the rate only low because it has a bonafide sales clause?

This is a type of product that sounds great due to a lower rate, but it also means you cannot break it unless you sell the home (or in some cases when your mortgage is up for renewal). This means no ability to refinance or even switch to a different lender early!

Is the rate only low because it is comes with a higher penalty?

Some lenders will offer a lower rate than their standard mortgage, but then charge a higher penalty that standard if you choose to break your term.

Is a HELOC important to you, and does the lender you're considering offer a HELOC product?

Is it a Re-advanceable HELOC?

A lender that has flexible products or generous qualfiication calcuations may offer a slightly higher rate for the unique products that they offer. In these cases, a slighty higher rate would be acceptable versus not being able to qualify with the lender offering the lower rate, or selecting a product that doesn't suit your overall needs simply due to a lower rate elsewhere

Does the lender use monthly compounding or semi-annual compounding in the mortgage interest calculations?

If you are comparing 2 different rate offers with 2 different lenders, the over all interest paid over the course of your term would differ depending on the way the mortgage interest is compounded. What may seem like a higher rate/payment at first glance could end up being a negligible difference over the course of your term
Your Mortgage Broker can prepare Amortization Tables comparing the 2 options to show you the actual difference in interest over the term.

For variable rates, does the lender offer a Variable Rate Mortgage (VRM) or and Adjustable Rate Mortgage (ARM)?

With a VRM, your mortgage payment does not increase (or decrease) with changes to the Prime rate. Your amortization and the portion of your payment that goes towards interest vs principal will adjust accordingly, until your payment no longer covers the interest portion of your mortgage payment at minimum.
Some lenders will require you to bring your Amortization back in line once the trigger point is reached, and some will require it at renewal
With an ARM, your payment adjusts automatically with any changes to Prime, keeping your Amortization on track

There are pros and cons and strategies with both VRM and ARM. Lenders will only offer either one or the other, so discussing which structure benefits you with your Mortgage Broker would help determine lender & product selection

There are many additional factors that may need to be considered based on your personal situation, but the above are the most common situations we see with our clients.

We strive to provide a customized and individualized service, as your goal is to support you not only through the initial mortgage process, but through your entire length of home ownership!

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