Getting the best mortgage rate on your home makes a huge difference in affordability and financial comfort. It can save you hundreds or cost you thousands, depending on what you receive as a rate. There are things you can start doing now that will help qualify you for a reasonable mortgage rate when the time comes to buy your home.
1. Know What Your Credit Score is
Everyone has heard of credit. The good, bad and the ugly truths. But without a good credit score, you may be in for not only not getting approval, but if you do, you may be left with a high-interest rate, making your home just out of reach for you.
What is a good credit score anyway? In Canada, “credit scores range anywhere from 300-900. It is recommended that borrowers have a minimum credit score of 700 at the time of approval, in order to qualify for a mortgage under $1,000,000.”
Don't despair if your credit score isn't quite up to snuff! There are things you can do to improve your number. Things like paying down or paying off other loans, making sure all past-due collection accounts are payed-off and staying up to date on all monthly payments. Another often overlooked area is your credit report. Sometimes there are errors or things not recorded properly that are hindering your score. Request a report and clean up any errors you discover. Increasing your score can be as easy as correcting those errors.
2. Gather your tax return from the last two years
Lenders prefer those clients who can prove they have a steady income and employment for at least two years. Being able to show income statements or income tax returns for the past two to three years is ideal. Long periods with no income or just newly acquired jobs do not reflect stability from a lenders' point of view.
There are other things you need to consider if you are self-employed or a small business owner. But in a nutshell, you should have a job letter, stubs, T4 for the latest 2 years for salaried, and T1 from the last 2 years for BFS i.e. self-employed.
3. The Higher the Down Payment the Better
Technically, you only need a down payment of five per cent for mortgage amounts up to $500,000 and 10 per cent for the amount that exceeds $500,000. However, the more down payment you can provide, the better the mortgage rate you might get. Mortgages tend to be allocated based on risk factors. The less money you put down, the more significant the risk.
Keep in mind, if you have a down payment of more than 20 per cent you won't have to purchase mortgage insurance. Just another tip to save money!
4. Debt to Income Ratio
Okay. Your credit score is good. Your income is stable. You have a mountain of debt. Oops. This situation could affect your interest rate. Heck, it may affect you getting approval at all. Even if you have the income, if you have too much debt, then your ability to pay your new mortgage loan comes into question. Debt-to-Income Ratio or DTI comes in two forms. One, it measures the total of all your monthly debt payments, plus your new mortgage payment, divided by your stable monthly gross income. Traditionally, lenders tend to want this ratio at no more than 30 per cent. Second, it focuses on your housing costs, excluding all other debts. Historically, lenders want to see this at no more than 28 per cent. This percentage can vary depending on the type of mortgage or other factors. It is important to note that lenders can request much higher ratios.
When considering your loan type, you need to decide what level of risk you wish to take and how long you plan to stay in your home. A variable-rate means the interest rate will fluctuate during the pre-determined term of the loan. Variable rates offered are usually prime, the best rates offered by banks to their best clients. Fixed means the interest rate stays the same for the term. They offer security and stability.
There are benefits to both. To help determine which suits your situation best, check out our article on the topic.
The duration of your mortgage will also make a difference. Whether you stretch the loan over 30 years or you have a plan to pay it off in 15 years, your rate may be affected. To choose which is right for you, check out our article on the topic.
According to the Government of Canada, the amortization period is the length of time it takes to pay off a mortgage in full. The longer the amortization period, the lower your payments will be. Keep in mind that the longer you choose to pay off your mortgage, the more you'll pay in interest.
If your down payment is less than 20 per cent of the purchase price of your home, the most extended amortization you are allowed is 25 years.
7. What if Interest Rates Rise?
It is essential to protect yourself if interest rates start to go up. Especially if you are in an open mortgage or variable rate. Ask your lender if it offers:
- an interest rate cap: a maximum interest rate your lender can charge on a mortgage. You'll never have to pay more in interest than the maximum cap, even if the interest rates rise
- a convertibility feature: where, at any time during your term, you can convert or change your mortgage to a fixed interest rate *
You are shopping around for the mortgage planner that knows their stuff and can best advise you on the steps to find the best mortgage rate. Also, they can educate you on being a mortgage consumer.
Make sure you have enough money in the bank after closing to cover your new mortgage payment for the next 60 days. That is the principal, interest, taxes, and insurance. If you are qualifying for a higher risk mortgage, you may be required to have higher cash reserves.
Note that if you choose a convertibility feature and adjust your mortgage to a fixed interest rate:
- you'll usually have to pay a fee
- certain conditions may apply
- your new fixed interest rate may be higher than the variable interest rate you've
**, *** source: Financial Consumer Agency