In 2016, over 500,000 Canadians bought a home and took on a new mortgage with the average price-tag for that home ringing in at $490,495 CDN. Now, if each of those 500,000 homeowners invested the average down payment and each took on a five-year fixed term mortgage rate at 2.5%, lenders would walk away with $6 billion in one year alone. Let’s just pause and digest that financial tidbit for a moment.
If you’re blown away by these numbers it might be time to learn how to put your shopping skills to work by learning how to find the best mortgage rate. Finding the best rate will benefit your finances in the short-term and the long-run. Just like any other skill, finding the best rate actually takes some knowledge and a bit of practice.
So, how do you find the best rate? And what, exactly, is considered the best rate? Is it simply the lowest mortgage rate you can possibly qualify for or is there more to this search? To help you hone your mortgage shopping skills here are six tips for finding the best mortgage rate.
1. What’s considered a “good” mortgage rate?
When you begin to research mortgage rates, you’ll notice that almost every lender advertises their “best” rate — a rate that’s based on a number of factors.
“It’s like asking what’s a reasonable price for a car,” says Robert McLister, the founder of rate consolidator site RateSpy.com. “Before getting an answer, first you must narrow down all the variables.”
In mortgages, these variables include term length, type of rate, fee cost, interest rates, and flexibility.
In general, however, a “good rate” is a mortgage rate that is below the market average, when all factors are taken into consideration. The “best rate” would be the absolute best mortgage rate you can obtain given all the factors (such as debt ratios, income status and credit score, as well as the cost of the house and the size of your down payment). As McLister explains, “the best mortgage rate is the one with the highest probability of maximizing your net worth.”
2. Should you accept your lender’s “best rate”?
It’s quite common for most buyers to simply choose the best mortgage rate offered by their current bank or lender. However, this will not always get you the best mortgage rate.
“The rate a lender offers you depends, in part, on how likely it is (in that lender’s view) that you’ll go elsewhere,” said McLister. “Lenders know that people don’t like change. Switching from a known entity (your existing financial institution) and applying elsewhere is a big change. So your home lender will often play off this and quote you higher rates upfront.”
On average, current mortgage rates vary from 2.5% to 4% for a five-year fixed term — but a lower rate doesn’t mean you are receiving the best deal. A good rate combined with a good product is what you need to look for when it comes to finding the best mortgage.
3. What makes a good mortgage product?
Before choosing a mortgage rate it’s a good idea to look at the two types of mortgage rates and which product is the better choice for your situation. The two major options are between a fixed and a variable rate mortgage.
Fixed mortgage rates stay the same throughout the entirety of your mortgage, whereas variable mortgage rates change depending on the prime lending rate. Prime lending rates can be either + or – the percentage. For example, a variable mortgage rate could be prime +1.85% — or 3% + 1.85% for a total mortgage rate of 4.85%.
How do you decide between one or the other? When it comes to fixed mortgage rates, a good time to lock-in would be when interest rates are expected to rise in the future.
As for variable mortgage rates, a good time to choose this option is when there is a large gap between fixed rates and variable rates and interest rates are not expected to rise much in the near future.
The last thing to consider when it comes to mortgage rate products is the prepayment and flexibility options available to you by the lender. If you get a great rate that doesn’t allow for prepayments than your stuck repaying that mortgage on the lender’s timeline, not your own.
4. When to use an online mortgage consolidator
Want the quickest way to shop the mortgage rates market? Use a rate consolidator, such as RateSpy.com, RateHub.com or RateSupermarket.com. The key is to pick a consolidator that shows a broad spectrum of lending rates.
“Consumers rely on rate sites, believing they compare numerous providers. But in reality, they’re only being exposed to a tiny fraction of the market,” says McLister. “The more providers you can compare, the better deal you’ll get.”
Better still, get strategic about how you use rate consolidator sites. McLister suggests using a three-step process to find the best mortgage rate:
1) Enter your mortgage type, amount, home value and province
2) Compare the lowest rates (be careful to read all the rate notes)
3) Contact the provider directly to confirm:
(a) if there’s any fine print, and
(b) if the rates apply to you.
The only time rate sites won’t help is when you don’t fit the conventional borrower profile — employed full-time, with a good credit score and low to no debt. For those with low credit scores, unstable income or self-employment or high debt, you’ll need to work with a mortgage broker or lender directly in order to get the best mortgage rates.
5. When to call a mortgage broker or agent?
So, you’ve scoured the rate sites, you contacted a few lenders about the small print on their loan requirements and you’ve narrowed down your list of possible lenders. Now it’s time to call a mortgage broker or agent.
What’s the difference? Mortgage agents are professionals who work for one company, such as a bank or credit union. A mortgage broker is an independent mortgage specialist that works with a number of lenders to match borrowers to the best mortgage.
Regardless of whether you opt to work with a broker or agent, it’s always wise to get professional advice if your credit score is under 680, or if you hold a lot of debt or you are self-employed or a contract worker. As McLister points out, this is when the advice of an experienced mortgage professional can really be useful in finding a great rate.
Plus, an experienced broker can be a valuable resource. “They can open your eyes to hidden costs you might not have thought about,” says McLister.
When selecting a mortgage expert to work with, consider their experience. A lack of experience can prevent them from recommending the best options, says McLister, as they may not be aware of all the market options. “Look for a mortgage specialist who’s been licensed for two to three years minimum, who’s closed $10+ million of mortgages in the last 12 months, and who does no more than half of their mortgages with the same lender.”
6. Think of the best times of year to shop around
Much like consumers consider shopping for certain items on Boxing Day, Cyber Monday and Black Friday, there are better times of the year to shop for the best mortgage rates.
McLister shared that the most competitive season in the mortgage rate market is in the spring.
“Lenders have their biggest quotas in March, April, May and June,” explains McLister. “Discounts in the spring may be five to 15 basis point larger, just because of competition alone.”
Is this a big enough reason to time your mortgage shopping for the spring? Experts say no, but if you’re looking to buy, renew or refinance around this time you can probably expect the most competitive rates of the year.
Either way, always take the time to look at all the factors that affect your mortgage rate. While finding the best mortgage rate often means finding the lowest rate there’s often more to the loan agreement than how much annual interest you’re expected to pay for the next five years.