This is why mortgage rates are suddenly way more complicated

If you’ve been shopping for a mortgage, you’ll have noticed that rates can be all over the map. That’s because mortgage rule changes in 2018 made the mortgage pricing matrix is much more complicated, and online mortgage quotes are little more than teaser rates. That’s why it’s important to have a basic understanding of the mechanics behind mortgage rates. Here’s a quick guide.

Variable mortgages and lines of credit

These loans hinge on the Bank of Canada’s “overnight rate”. Eight times a year the Bank of Canada determines if they’re changing this rate. While they may hold the rate, they’ll increase it when the economy strengthens and inflation is a concern, and decrease it if they need to get the economy moving. It’s a careful balance. The chartered banks base their prime lending rate on this overnight rate because it influences their own borrowing. So, if the central bank changes the overnight rate, it’s sending a signal to the banks to change their prime rate, which in most cases they will, passing on some or all of the change to their variable/line of credit clients.

Fixed rate mortgages

In contrast, lenders use Government of Canada bonds to establish pricing for fixed-rate mortgages, so you need to watch bond yields to determine where fixed mortgage rates are heading.

Mortgage rates now depend on whether your mortgage is insured, insurable, or un-insurable

The mortgage rules mean lenders often have different rules and rates for insured, insurable and un-insurable mortgages.  How do you know which one you need?

Insured mortgage

This applies to you if:

• You are purchasing a property
• You will occupy the property as your primary residence or a “second home”
• Your down payment is less than 20% of the purchase price
• Your purchase price is less than $999,999
• You qualify using the Bank of Canada benchmark mortgage rate and a 25 year amortization

If the mortgage is insured, you’ll get the best mortgage rates.  However, you’ll need to pay for the cost of the default insurance (Sagen, CMHC, or Canada Guaranty).

Insurable mortgage

This applies to you if:

• You are purchasing a property
• You will occupy the property as your primary residence or a “second home”
• Your down payment is more than 20% of the purchase price
• Your purchase price is less than $999,999
• You qualify using the Bank of Canada benchmark mortgage rate, or the stress test rate, and a 25 year amortization

If the mortgage is insurable, you won’t be paying for the cost of the mortgage insurance.  The lender covers this for you.  And the mortgage rates can be almost as good as with insured mortgages, especially if your down payment is 35% or more of the purchase price.

Un-insurable mortgage

This applies to you if you’re refinancing a property, or if:

• You will not occupy the property – for example, it’s a rental property and you won’t be living in any of the units
• If you’re purchasing, your purchase price is $1,000,000 or greater
• You want a 30 year amortization or greater
• You don’t qualify using the stress test rate
• Your credit score is below 600

If the mortgage is un-insurable, you can expect to pay rates that are a bit higher, especially if your situation means you don’t qualify on the stress test rate.  Additionally, you can expect to pay more if it’s difficult to prove your income or you have bad credit and need to go with a B lender.

Get good advice

As a result, be wary of rates you see online!  They can sometimes be a bit of a bait and switch, and not really applicable to your financial situation.

Without a doubt, the mortgage rules have made the mortgage landscape significantly more confusing. Getting good solid advice is critical.  Let me know if you’d like to chat.

Photo credit: [c] Manassanant Pamai for vecteezy.com

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