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A mortgage rate is the interest rate or the price you pay for a mortgage loan. It is quoted as a percentage of the mortgage loan. This interest rate is applied to the mortgage loan to determine your mortgage payment.
Everything being equal, the higher your mortgage rate, the higher your mortgage payments; the lower your mortgage rate, the lower your mortgage payments.
In Canada, mortgage rates typically take three forms: fixed, variable, and hybrid.
A fixed-rate means the mortgage interest rate does not change over the contract term. Your required mortgage payments will stay the same throughout the mortgage term even if the market, bond, and prime rates go up and down. This type of mortgage is great for those who want predictable and consistent payments.
This type of mortgage rate’s predictable and consistent nature usually comes with a high price tag. A similar-term mortgage at a fixed rate will be higher than a comparable variable-rate mortgage.
On the flip side, the variable interest rate changes as the market, prime or specific benchmark rates change. The payment is sensitive to changes in the prime or benchmark rate.
Variable mortgage rates are quoted at a premium or discount from the lender’s prime or special benchmark rate. Expect a change to your payments if the underlying factors influencing the benchmark prime rate change.
Given the fluctuating nature of the variable rate, your mortgage payments may be inconsistent and less predictable over the term of your mortgage contract.
Also known as convertible-rate mortgages, they are quoted as a variable rate with an added option to convert the mortgage rate to a fixed rate after a certain period during the mortgage contract term.
As explained above, payments for fixed-rate mortgages are fixed over the mortgage loan term. Therefore, switching from a variable to a fixed will allow you to enjoy consistent and predictable mortgage payments.
Lenders used a risk-based pricing model to determine the mortgage rate for each application. That means that two applications for similar mortgage products should expect different mortgage rates if their income, credit, and property profiles differ.
You usually see the lowest mortgage rate advertised online. These are plain vanilla mortgage rates. Premiums and discounts are applied to these advertised rates according to the risk of each application.
Your credit score is a significant element in mortgage pricing to determine your mortgage rate. The lowest mortgage rates are meant for individuals with credit scores of 680 and above—applicants in this credit scores range are who we call Prime-Plus applicants.
Low mortgage rates’ following best credit score range is 600 to 680. This is the Standard Prime range. You should expect a lower mortgage rate, but it may not be as low as those offered to applicants with credit scores in the 680-plus range.
Generally, you are considered a Prime mortgage client if your credit score is 600 and over. Prime mortgages are offered at affordable rates with reasonable terms.
Credit scores of 600 and lower are meant for Alternative mortgage products. Unlike prime mortgage products, alternative mortgage products are offered at lower loan-to-value (LTV) ratios, higher mortgage rates, shorter terms, and possibly require lender fees.
In addition to credit score and property usage, the property’s location is a factor to consider when pricing a mortgage loan. The property’s location indicates how easy it will be to resell it if it goes into foreclosure.
You should expect properties in Toronto. Vancouver, Mississauga, Calgary, and other metro-urban cities in Canada will sell fast and at top value, thus being priced (mortgage rate) favourably. Given their low marketability, properties in rural communities may have a rate premium.
However, the sensitivity of mortgage rates to property location depends upon the type of mortgage program.
Insured and Insurable mortgage loans are less sensitive to the property location variable. On the other hand, uninsurable mortgage loan products are susceptible to the property location.
Insured mortgage products are covered by Default Insurance offered by CHMC, Canada Guaranty, or Segen.
Loan-to-Value(LTV) ratio indicates the proportion of all the loans secured against your property to your property’s market value. It is a critical element in mortgage rate pricing because it represents the amount that could be recovered in the event of default, especially if the loan goes into foreclosure.
In a purchase transaction, the LTV compares the ratio of your down payment to the property’s purchase price.
In a mortgage refinance transaction, the LTV compares the value of the requested new loan amount to the property’s appraised value.
Generally, the lower the LTV, the lower the default risk; the higher the LTV, the higher the default risk.
Lower LTV can help you demand a low mortgage rate since you are considered less risky given that you have high equity in the property. Your low LTV translates to a standard mortgage loan amount, meaning the lender risks less since you have invested more in the property.
On the other hand, the higher the LTV, the lower your ability to demand a low mortgage rate, given the high default risk.
With the property’s marketability, expect a rate premium if your property is on a well and septic system.
It is common for properties in rural communities to be on such systems. If it goes into foreclosure, it may be hard for lenders to resell the property if the well and septic systems are not well-maintained.
Metro and urban areas have municipal water and septic systems that require no upkeep.
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