Understanding Your Mortgage Rate

One of the most important influencers of mortgage rates is the Bank of Canada rate but what are the other factors that determine the mortgage rates? There are several factors that affect the interest a borrower will pay on their mortgage loan. By knowing the factors affecting your interest rate, you will have a better understanding of the mortgage rates available to you.

Credit Score

Credit score is one of the most common factors that affects the interest rate you will be receiving when applying for a mortgage. Your credit score determines whether you will be able to qualify for a mortgage in the first place including the amount of loan as well. To qualify for a mortgage, you must have a minimum credit score of 650 for one borrower, and the higher your credit score, the more it will showcase that you are a reliable borrower, leading to better rates and easier qualification.

Loan-to-Value (LTV) Ratio

This ratio determines the value of the amount being borrowed as a percentage of the overall home value. The main factors that affect LTV ratios are the purchase prices of the home, the appraised value of the home, and the amount of down payment. Paying a larger down payment for a home will lower the mortgage amount which results in a lower LTV and will appeal to more lenders. As an example, when purchasing a home being appraised at $500,000 with a down payment of 20% ($100,000), your mortgage amount would be $400,000 and your LTV ratio would be 80%. By having lower LTV ratio, you will be able to capitalise on better interest rates.

Insured vs Uninsured

Having an insured or uninsured mortgage is dependent on the amount of down payment you are able to pay. Under normal circumstances, if your down payment is less than 20%, you will have to insure your property with mortgage default insurance, and depending on the insurer, this will have an impact on your borrowing power as well as interest rates. If you pay a 20% or larger down payment, then your mortgage will not require CMHC insurance. However, you should note that while insured mortgages have a lower interest rate, this is offset by the mortgage insurance premium that is added to the loan.

Fixed vs. Variable Rate

Although there are benefits to both fixed and variable mortgage rates, it is essential to comprehend how they impact your interest rate. Fixed mortgage rates are based on the bond market, and this is dependent on the amount that is demanded by global investors to be paid for long-term lending. On the hand, variable mortgage rates are dependent on Bank of Canada’s overnight lending rates. Because the BoC’s overnight lending rates could change multiple times in a year, variable mortgage rates are directly affected by the economic state at-home as compared to fixed rates which are impacted by global factors.

Refinancing

The concept of refinancing refers to the restructure of your current mortgage when your mortgage term ends. Your interest rates are affected whether you are changing your mortgage from fixed to variable rate or vice versa. It is important to note that new buyers will be offered lower interest rates as compared to individuals who are refinancing their mortgage.

Income Level

Although the level of income does not have a direct impact on the interest rates you will be receiving, it will affect your purchasing power along with the amount of down payment you are able to make.