What's your best rate?

Often calls from new clients start with “I’m looking for help with a mortgage. What’s your best rate?”

I’m pretty sure that I frustrate some of those clients with my reply which is “It all depends.”

The short explanation is that the best rate for each client truly depends on their particular circumstances.

Prior to October 2016, this question could be met with a very simple answer. Generally speaking, we could find the best rate fairly easily. If the client was putting down less than 20 per cent, we could search out the best insured rate. If they were putting down more than 20 per cent, we could search for the best conventional rate.

In October 2016, several important changes were implemented that changed which mortgages are considered insurable and which mortgages are not.

Four of the main changes were:

• Properties with a purchase price of over $1 million could no longer be insured
• Mortgages with an amortization of more than 25 years could no longer be insured
• Rental properties could no longer be insured
• Refinances could no longer be insured

So how do these changes affect your interest rate?

These changes effectively created three different groups of interest rates:

• Insured
• Insurable 
• Uninsurable

When you see interest rates advertised on TV or online, most often the insured rates are featured. These rates are the lowest of the three rate groups because you pay an insurance premium (this is added to the mortgage) so the lender will not suffer a loss if down the road the client defaults on their mortgage.

Insurable rates apply if you are putting down more than 20 per cent but meet the other criteria required to qualify for an insured mortgage: purchase price is under $1 million, your amortization is 25 years or less, and you are not buying a rental property. 

Because you do not have to pay an insurance premium, even though the rate is slightly higher, you pay less interest over the long haul and your mortgage balance is lower at renewal as you are not adding the insurance premium to the amount you borrow.

I’ve run the calculations many times to show clients that in this circumstance even though the rate is higher, it costs them less in the long run.

The third rate group applies if you are buying a rental property, refinancing, or needing an amortization longer than 25 years (you must have at least 20 per cent down for the longer amortization). The higher (perceived) risk to lenders is reflected by slightly higher interest rates.

To further complicate the best-rate conversation, there are intricacies within each of these rate categories.

For instance, if you are self-employed and we are using a specific stated income program, some lenders will increase the rate slightly.

If your application falls into the insurable group and you are putting 35 or more per cent down, some lenders use a sliding scale and reduce your rate slightly to reflect the amount of equity you have in your home.

If you are wanting to use a Purchase Plus Improvements mortgage to renovate your new home right away, some lenders do not offer this as an option.

Yet another twist is that many lenders offer a no-frills mortgage option which is usually priced .05 per cent lower than their other mortgages.

Several lenders offer cash-back mortgages. They will provide a lump sum up front for you and this is reflected in a slightly higher rate. It is crucial to know that for most of these products if you try to pay these mortgages back even one day before your renewal date they will require that the full cash-back amount be repaid.

This means that you are locked in for the full term or have to pay a hefty amount to break your mortgage.

From time to time lenders come out swinging with bargain basement interest rates. It is important to know that these rates often come with strings attached, or clauses that may cost you more in the long run.

The no-frills mortgages may be the right fit for you, but it is important that you understand what saving that .05 per cent might cost you in the long run. Some of these products come with a bona-fide sales clause or higher penalty if you need to pay the mortgage in full before the renewal date. Some are not portable to another property.

Future client service is a feature that it is hard to put a price on. One financial institution comes out every spring advertising the lowest of the low interest rates. They are notorious for missing closing dates, poor service after the mortgage has been advanced, and their penalties are significantly higher than other mortgage lenders. As well, from time to time they choose not to renew mortgages – not because of anything the client has done but because they are not actively in the mortgage business at the time.

There are online brokerages that offer low low rates as well. I’ve heard from several clients that the rate they were offered when their approval arrived was not what was initially discussed. 

If you are looking for a mortgage, the lowest rate is not always the best rate. It is important to do your homework upfront to understand your options.

Arguably more important is to work with someone that takes the time to understand your unique situation and treats you as a human being. If you are looking for help with a mortgage and wondering which rate group you fit into, we are happy to spend a few minutes helping you explore options.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.