Canada’s mortgage rates are rising fast — here’s how to secure the lowest rate possible
Homebuyers and homeowners rushed to join the party when the COVID-19 crisis produced some of the cheapest mortgages Canadians had ever seen.
Dirt-cheap interest rates, fewer home listings, and high demand fuelled sales. As a result, a record-breaking 551,000 homes changed hands in 2020, according to the Canadian Real Estate Association.
But now, five-year fixed mortgage rates are beginning to climb for the first time since before the pandemic hit. And, Canadians looking to capitalize on historically low rates may want to act now, before mortgage rates rise further.
Here are six steps to nail down an ultra-low rate while you still can.
1. Don’t dawdle
Mortgage rates started tumbling last year after the Bank of Canada slashed its key policy rate three times in March 2020 to a record-low 0.25 percent, to help the economy weather the pandemic.
As home lending rates tanked, borrowers with strong credit found they could refinance a five-year fixed-rate home loan at rates below 1.5 percent — the cheapest Canadians had ever seen.
Now, major banks including TD Bank and National Bank of Canada say they have raised rates on at least some mortgage products as growing optimism over the economy has sent the yield on the Canada five-year bond soaring.
Would-be borrowers who don’t act promptly run the risk of losing out on mortgage rates that are still very low by historical standards.
“The fixed rates have gone up about a quarter-point and people may be nervous about that, but you still have rates at or just under the 2 percent range,” says Jason Zuckerman, a Montreal-based real estate mortgage broker.
2. Look your best as a borrower
Before you start the mortgage application process, you’ll want to make sure you have minimal debt, good credit, and proof of adequate work income. Lenders also will want to see that you can produce a down payment.
“Banks want to make sure that you don’t have too much debt,” says Zuckerman. “They also want to make sure that you’re managing your debt and you know how to use credit responsibly.”
Your credit score will need to be at least 660. Anyone with a score below 560 will struggle to get a decent interest rate and may not get a loan at all. Anything above 760 is excellent.
As for your income, it’s important to show banks you have steady employment.
“If you’re employed, they generally want to see full-time, salaried individuals,” Zuckerman says. “If you’re contractually or self-employed, lenders typically use the last two years of your income.”
You can usually qualify for a mortgage worth five times your gross (pre-tax) income if you can produce a down payment and don’t have a large debt, he adds.
3. Shop, shop, shop around
The first go-to for many applicants looking for a mortgage is their own bank.
A low rate means a low monthly mortgage payment. On a fixed-rate mortgage, your rate and payment amount will not change during your mortgage term, typically five years.
As you look at loan offers side by side, pay attention to “points.”
Mortgage points are upfront fees you can pay in exchange for a lower mortgage rate. Each point you buy generally costs 1 percent of your loan amount and reduces your interest rate by one-quarter of 1 percentage point (0.25).
4. Get pre-approved
Getting a mortgage pre-approval is smart, particularly if you’re a homebuyer who’s likely to want a fixed-rate mortgage, says Reza Sabour, a senior adviser and director with the Canadian Mortgage Brokers Association of B.C.
A pre-approval is a formal letter from a lender that lays out how much money you can borrow and at what interest rate.
“In a very competitive real estate market where you and potentially 10 other people are looking at putting an offer on the same property, that seller is more inclined to go with a buyer who can show proof that they’re pre-approved,” Sabour says.
And that’s especially true now during the COVID-19 situation, he adds.
“Realtors are sort of expecting that their clients will be pre-approved. In a pandemic situation, in a lot of cases, you have to make an appointment to view something,” he says. “They might not want to put the time into doing that if the client is not already pre-approved.”
5. Avoid big life changes after pre-approval
So you’re pre-approved. Now what? For starters, don’t make any new, large financial commitments prior to buying a home or refinancing an existing mortgage.
It may seem obvious, says Sabour, but people often don’t follow this sound advice.
“Someone gets pre-approved for a mortgage and it’s good for four months. Within that four-month window, they lease that BMW at $1,200 a month and they don’t tell us,” he says.
Then, here’s what happens: “They make an offer on a home subject to financing. We pull their credit bureau and we see this gigantic lease payment that essentially kiboshes all the work we’ve done.”
Sabour says he sees this scenario played out with at least two out of every five mortgage applications.
6. Have your closing costs ready
Closing costs are fees you’ll pay to finalize your loan. Lenders generally have flexibility in setting their own costs, so you may be able to negotiate some of the charges.
Typical closing costs include home inspection fees, various taxes, title insurance (to protect the lender against any ownership disputes that might crop up), legal costs, and reimbursements of any utility charges that the seller has prepaid.
And, when you’re buying a home, the closing ends when you proudly receive the keys to your new place. Champagne, anyone?
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