Given the recent mortgage rate hikes, finding ways to save on your mortgage has become more important than ever. Is it best to wait for mortgage rates to fall, or should you opt for a variable rate instead? Does changing your amortization period affect how you calculate your monthly mortgage payments? In this guide, we hope to answer all these questions and more.
Factors Affecting Your Mortgage Rate
The overnight lending rate, also known as the benchmark rate, is the rate that lenders base their prime lending rate on. The lowest interest rate that lenders charge to borrowers is either a variable or adjustable rate based on Prime or a fixed rate that is closely tied to economic policy and bond yields.
For the most part, all Canadian mortgage interest rates, that are either variable or adjustable rates, rise when the Bank of Canada raises this overnight rate, irrespective of the lender. In 2022, the Bank of Canada raised the benchmark rate seven times, impacting mortgage rates across the nation.
While the benchmark rate is dependent on external conditions, there are a few personal factors that can also impact your mortgage rate:
Your Credit Score
In Canada, credit scores range from 300 to 900 and are based on your borrowing history. A higher score indicates that you have a strong history of timely debt repayments and thereby pose less of a risk to lenders. Most lenders will offer lower interest rates to borrowers with higher credit scores— typically above 750.
Your debt-to-income (GDS and TDS) ratio is calculated by dividing the amount you pay per month by the amount you make per month. It factors in your future mortgage payments, if approved. Typically, lenders look for a GDS ratio and TDS ratio under 39% and 44% respectively, but lower ratios may qualify you for even lower interest rates. Higher ratio exceptions and programs are available, though they tend to come with higher rates to mitigate for the increased risk the lender takes on.
Income and Employment
When applying for a mortgage, your lender will likely ask for proof of employment. They may also ask you to provide a job letter, recent pay stubs, or tax filings to prove your income. Applicants with higher incomes are perceived to have a greater ability to make their monthly mortgage payments and thus may qualify for lower interest rates. However, mortgage products are readily available for self-employed individuals who may declare their income in a less than traditional fashion.
The Size of Your Down Payment
For any property, there is a minimum down payment you will be required to put down. However, it is important to note that the higher you make your down payment, the smaller your mortgage will be. A smaller mortgage usually means that you can qualify for more favourable terms including lower interest rates. In addition to this, all down payments under 20% are subject to CMHC mortgage loan insurance, which can lead to some cost-savings, but it also comes with some additional costs.
Given this, it may seem counter-intuitive to suggest making a smaller down payment to save money. However, as discussed, lenders offer lower interest rates to borrowers they perceive as being less risky. Because all borrowers who put down less than 20% on their down payment are required to take out mortgage default insurance on their loan, they may actually be less risky than borrowers putting down 20% given that the lender is covered from any losses.
To decide which down payment will save you the most in the long-term, we recommend consulting a Clover Mortgage professional broker, in order to gain access to a wider range of lenders and mortgage products. For more information, check out our guide on choosing the ideal down payment.
The Amount of Home Equity and Loan to Value
When refinancing a property, the loan to value (LTV) can play a role in helping you get the best mortgage rate. Many lenders will give better rates for homeowners looking to refinance at a 65% loan to value or lower, leaving at least 35% or more equity in their homes. This is because this range of LTV provides the lender with more security should they be forced to take your home and sell it in the event of default during a down market.
When approaching the 75% to 80% loan to value ranges, the interest rates start to increase when it comes to a mortgage refinance.
How to Save on Your Mortgage Payments
Beyond simply improving your credit score, debt ratios and other qualification criteria, here are some lesser-known strategies you can employ to help save on your monthly mortgage payments.
Make Payments Twice a Month or Bi-Weekly
When deciding the terms of your mortgage, you can save on interest expenses by making your mortgage payments bi-weekly, not to be confused with twice a month, instead of just once a month. Over the course of a year, making bi-weekly payments amounts to extra payments which will reduce your amortization period. This will help you pay off your mortgage sooner. The more mortgage you pay off per year, the more you save in interest costs in the long-term. For more information, check out our comprehensive guide on mortgage payment schedules.
Avoid Penalties When Breaking Your Mortgage
If you are looking to take on a new mortgage before your previous mortgage term has ended, you may be subject to fees for breaking your mortgage early. In Canada, typically you will be required to pay three months of interest in order to break your mortgage before the end of term if your mortgage is a variable or adjustable rate. If your mortgage is a fixed-rate mortgage, than you typically would be subject to the greater of interest rate differential (IRD) or three months of interest payments.
Luckily, there may be ways for you to circumvent some of these fees entirely. One way you can do this is by porting your mortgage, provided that the mortgage you take out is portable. When you port your mortgage, you transfer your old loan to your new home. You may even be able to potentially combine it with a brand-new loan. For more information, check out our guide on how to best port your mortgage.
Another strategy is to consider an assumable mortgage. Some lenders will allow you to pass on your current mortgage to a qualified and low-risk buyer. However, it is important to check in with your mortgage broker or with your lender ahead of time, as not all of them offer this possibility.
Take Advantage of Pre-Payment Privileges
The faster you pay off your principal, the less you will have to pay in interest. Some lenders will allow you to “pre-pay” a certain percentage of your principal. Other lenders will offer you a better interest rate in exchange for a no pre-payment agreement or more limited pre-payment terms. If you are interested in making more payments upfront, make sure to ask your broker or your lender what sort of pre-payment privileges your mortgage permits.
Tips on Finding the Best Mortgage Plan for You
The best way to save on your mortgage is by finding the best mortgage plan for you. In order to maximize your odds of success, shopping around for different lenders is encouraged. The Financial Consumer Agency of Canada recommends comparing rates and terms from at least three different lenders before settling on a mortgage provider.
According to the Bank of Canada research, employing a mortgage broker might lead to a cheaper mortgage rate than working with the major banks directly. Why? Brokers have access to a variety of lenders, giving them access to even more affordable offers and allowing them the ability to force lenders to be more competitive with their rates. Experienced mortgage brokers are also able to negotiate the lowest rates for their customers.
Here at Clover Mortgage, our team has experience working with a network of over 60 different lenders. Our professional brokers have the expertise, insight, and network needed to connect you with the best rates and terms for you. Contact Clover Mortgage to schedule a free consultation and lock in your low rate today!