Whether you’re hoping to go shopping for your first home or want to refinance your current home loan, there is always uncertainty as to what interest rate you’ll be offered. While you can shop around for a better interest rate, you’ll find far more flexibility with regard to fees and loan terms than get a mortgage with a half-point lower interest rate than what you were initially offered. Let’s learn more about the factors that affect your mortgage rate.
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The State of the Canadian Economy
Trade wars, flu scares, or general economic malaise can all pull down the economy. The Canadian government typically responds by lowering interest rates to prevent the economy from sliding into a recession. The interest rates set by the Bank of Canada rise when the government is trying to check inflation before it gets out of control.
Your Personal Credit
The biggest factor affecting the interest rate you are offered aside from the national and world economy is your personal credit. The interest rate you’re offered is a reflection of the perceived risk of doing business with you. If you have a low debt to income ratio, excellent payment history and good overall credit, you’ll be offered the lowest possible interest rate. Miss a few payments, even if they aren’t debt payments, and your credit suffers. For example, paying your car insurance late or forgetting a phone bill will ding your credit.
You could even hurt your creditworthiness by mistake. For example, a new graduate might buy a new car while they’re shopping for a new home. This increases your debt to income ratio and just made you a greater credit risk to lenders. Debt settlement programs that tell you to stop paying the bills until creditors let you settle for a fraction of what you owe may reduce your debt load, but this is almost as bad as a bankruptcy in the eyes of other lenders.
You could improve your credit profile by having a reputable co-signer. However, your credit suffers if you co-sign for someone else who fails to make the payments. And your credit takes a hit if that debt goes into collections.
The Loan Terms
Adjustable or variable interest rates tend to be lower than fixed rate mortgages, since they have less risk for the lender. If interest rates are rising, the adjustable rate mortgage correspondingly rises. Because lenders won’t lose money, they can offer a mortgage rate just above the Bank of Canada’s interest rate. Fixed rate mortgages come with the risk of lenders losing money because inflation may go higher than the interest rate the lender is charging.
The size of your down payment affects the interest rate, as well. A home purchased with twenty percent or more down is relatively low risk for a lender, since it is almost impossible for them to lose money on it even if they had to foreclose on it. In contrast, they risk losing money after paying to service the loan, not getting paid for several months and then foreclosing on the property when the buyer had only five percent equity.
Shorter loan terms generally come with a lower interest rate, as well. You’re more likely to pay off the loan in 15 years than 25. And the lender has less risk overall, since you’re paying down the principal balance that much faster. Prepaying interest reduces their risk, since you’re guaranteeing that they earn that much interest on the loan. Lenders will charge a higher interest rate on loans that may not yield the interest rate they were expecting. This is why open mortgages have a higher interest rate than closed ones.
Interest rates vary between lenders. Credit unions tend to offer lower interest rates than banks because they aren’t trying to earn a profit. Lenders who specialize in bad credit loans typically extend loans with a lower interest rate than the big banks, though the interest rates they have will be higher than what you would get if you have good credit. They’re able to do this by carefully vetting their clients. They won’t just charge twice as much because you had a business failure, bankruptcy or divorce behind you. However, they’ll carefully review your bill payment history, debt to income load, income and general trend line. If you’re digging yourself out of a hole, they’ll recognize this and extend a loan with more reasonable terms than a big bank.
Private lenders regularly offer better interest rates or loan terms than the big banks. Talk to a Calgary mortgage broker to learn what options they’re able to give you.
Jumbo loans typically have a higher interest rate than a more modest mortgage. This is simply because of the greater risk to the lender. It is easier to sell a 200,000 dollar single family home than a million dollar one. This means the more modest home has less risk of becoming a liability for the lender.
Non-conforming properties are those that lenders are reluctant to fund, because they’re difficult to sell if the property is foreclosed on. This includes unusually built homes, commercial properties with a residence, and properties built by hand. There’s a limited market for such properties, and most lenders won’t consider giving you a mortgage to buy it.
Lenders see second homes and vacation properties as higher risk, as well. The idea is that home owners will do everything possible to avoid being evicted from their primary residence, but you may stop paying on the vacation condo if you’re financially stressed. Rural property is treated with similar kid gloves, since these properties are have weaker demand, as well. The rare exceptions are vacation properties in popular areas, but a vacation home a few miles away from a hot ski resort will be treated as higher risk. Low demand explains why agricultural properties are often hard to finance unless you go through a farm lender, even if it is a rural vacation home that doubles as a working farm. Raw land is even harder to finance unless it is a vacant lot in a suburban subdivision.
However, similar problems can urban properties. A neighborhood with a high crime rate or high foreclosure rate may be seen as a greater risk than a comparable property on the other side of the highway.