If you’re thinking of buying a home in the near future, you’re probably shopping around for a mortgage in hopes of getting the lowest interest rate possible. But did you know that your rate is subject to vary depending on your situation and the product you choose? Here’s everything you need to know about finding the best mortgage rate for you.
What is the best rate?
Over the course of your mortgage term, your rate will impact how much you pay in interest. That being said, the best rate isn’t necessarily the lowest one. In addition to your interest rate, when you’re shopping for the best mortgage for your needs and situation, you also need to consider the terms and conditions of your loan.
Fixed or variable
While variable rates have proven to be more cost-effective in the past, fixed rates have the advantage of ensuring your payments will remain stable throughout your mortgage term, even if rates go up.
On the other hand, some lenders may offer you a variable rate while allowing you to make fixed payments. This option lets you pay more towards your principal and save on interest if rates fall, and vice versa if rates go up. In the event that rates increase, there will be less of an impact on your daily budget.
Blended rates, which combine fixed and variable rates into a single mortgage, are another option you might consider.
No matter what type of rate you choose, keep in mind that each option comes with its own terms and limitations. A fixed rate loan from one financial institution won’t necessarily be the same as the one you’ll get from a competing bank.
Open or closed mortgage
“Open” mortgages have a higher interest rate, but let you repay your mortgage, either partially or in full, at any time without penalty. If you’re expecting to receive a large amount of money in the near future and want to reduce your mortgage balance, this could be an attractive option, even if the interest rate is higher than what you’d get with a “closed” mortgage.
The mortgage term
Although most mortgages have a five-year term, terms can vary from six months to ten years. Short-term loans usually have a lower rate.
What is a cash-back mortgage?
Offered by a number of financial institutions, cash-back mortgages allow you to withdraw a certain amount of money as soon as you close or renew your mortgage, typically corresponding to a percentage of the capital you borrowed. In exchange, you pay a higher interest rate than what you’d get with a standard mortgage.
Conventional or insured loan
If the mortgage doesn’t exceed 80% of the market value of the property, you will not be required to take out mortgage insurance. However, banks tend to offer a lower rate for insured loans than for conventional loans.
The use of the property
In general, you’ll get a better rate if you’re buying a property that you intend to live in, because lenders assume you’re more likely to keep paying the mortgage on your primary residence than on a rental property in the event of financial difficulties.
Your financial situation
Your personal financial situation can also affect the mortgage rate a lender will offer you.
Your credit rating
Ranging between 300 and 900, your credit score allows the bank to analyze your payment history and the way you manage credit in order to assess your ability to repay your debts. The higher your score is, the better your mortgage options will be. That said, it’s important to note thatyour credit report has four scores, and different lenders tend to look at different scores.
Your income
Your annual income and employment status are also important when it comes to determining your interest rate. For example, salaried employees are usually offered better conditions than self-employed workers.
Renewing your mortgage, an opportunity to get a better rate
Renewing your mortgage can be a good opportunity to get a better rate from your bank or another financial institution, since you’ll most likely be able to negotiate better terms. You can also decide to renew your mortgage early if current interest rates drop. There may be penalties associated with this option, however.
In some cases, refinancing your mortgage can allow you to convert a portion of your home’s equity into cash and get a better interest rate. That said, this option may come with penalties and additional charges for appraising the value of your property and signing the notarial act, since it is treated as a new loan application.
A broker can help
Don’t hesitate to consult your Multi-Prêts broker to secure the best mortgage rate for your needs and situation.
Key takeaways
- The best rate isn’t necessarily the lowest one.
- Your loan terms and financial situation will have an influence on your mortgage rate.
- Renewing or refinancing your mortgage can help you get a better rate.