10 obstacles to getting the best mortgage rate

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It is a given that anyone with a mortgage wants the lowest possible rate. But there is a wide range of requirements for that stop borrowers from getting the best all-around deal, and some of them are counter-intuitive. Once a homebuyer has chosen the term and rate type for their mortgage, they often discover that rates for that same term can vary by a percentage point or more. Countless factors can keep borrowers from getting a great deal. Here are 10 of the most common obstacles:

Rates vary by province

Ontario usually has the most competitive rates in Canada, in part because it has the largest number of competitors. People living in the Prairies or the East Coast usually pay one-tenth to two-tenths of a percentage point more than residents in Ontario. Furthermore, home owners in Alberta often have to put down more equity to get the lowest available rates (due to larger default risks in Alberta). Borrowers in Manitoba have the cheapest six-month rates, whereas borrowers in Quebec have some of the best 10 year rates.

A long rate hold

The farther into the future your closing date, the longer the rate guarantee you will need. Also, the higher a lender’s rate hedging costs and the higher your interest rate. The cheapest rates in the market are generally for quick closes. Meaning you must complete the mortgage in 30 to 45 days after applying. Applying one month from closing can decrease one-tenth to two-tenths of a percentage point from your rate, but the risk is that rates jump even more while you are waiting.

You are refinancing

Lenders love to finance purchases. So mortgages for new homebuyers sometimes have lower rates than mortgages for refinances. What is more, refinances, which essentially require a whole new mortgage, often have lower rates than mortgage transfers, where you’re switching lenders yet the key mortgage terms remain the same.

You have a condo or atypical property

Some lenders charge more for high-rise condos. The same goes for cottages, co-ops, hotel condos, former grow-ops, larger multi-unit residences and other atypical structures, which lenders view as higher risk.

The property is not your full-time dwelling

The cheapest rates in the country often do not apply to income-generating properties that the owner doesn’t live in. These deals are statistically a higher risk for lenders and investors, so it is common to have a higher interest rate.

Your credit score is too low

The magic number is 680, which is the most common minimum credit score to qualify for the best rates, especially if you have a higher debt ratio or a smaller down payment. But that number isn’t all. To qualify for the best pricing you also need a two-year track record of managing your credit with no serious delinquencies!

You want flexibility

Some of the nation’s lowest rates come with catches, such as below average prepayment privileges. This limits your ability to save interest by making lump-sum extra payments. Instead of prepaying 15 percent to 30 percent annually a “no frills” rate might limit you to prepaying 5 percent or 10 percent. Restricted mortgages can also impose costly penalties, disable you from refinancing elsewhere before your term is up and prevent you from increasing your mortgage without penalty.

Your mortgage is not insured

In many cases, people with smaller down payments (less than 20 percent) get better rates. That’s because their mortgages must generally be insured. Lenders like insured mortgages because someone else shares the risk if the borrower defaults.

Your mortgage is too big

For lenders, bigger mortgages mean potential bigger losses on default. This added risk results in rate premiums and stricter lending limits, especially on million-dollar mortgages without at least 25 to 35 percent down payments.

Your income is too low

If you are newly self-employed, are on probation or you cannot prove one to two years’ worth of stable salaried income, it can cost you. You may also need a bigger down payment. Lenders want less than 40 to 44 percent of your provable income to go toward debt.

Looking at this list tells us that in a nutshell, a homebuyer will get the best deal if they have a good credit score, don’t care about mortgage restrictions and are buying a detached urban home in Ontario that’s closing in 30 days. Be an informed borrower!