Mortgage Basics

How To Choose A Mortgage Rate In Canada?

How To Choose A Mortgage Rate In Canada?
Written by
  • Ashley Howard
| 24 May 2023
Reviewed, 12 June 2023

Table of contents

    Choosing a mortgage rate is one of the most important decisions when buying a home. While lower rates may be the most appealing on paper, there are many factors that you will need to consider before you select the best rate for your needs. With so many different lenders, rates, and terms available to choose from, this decision becomes even more challenging to know which one is best. 

    Fortunately, whether you’re a first-time homebuyer or looking to renew/refinance your existing mortgage, this guide will help simplify the process by providing insights into what goes into rates and how you can take the necessary steps to choose the best mortgage rate for your situation.

    Key Takeaways

    • Mortgage rates refer to the interest paid on a borrowed amount to finance the purchase of a home.
    • The Bank of Canada may need to raise rates again if inflation stays high.
    • The housing market, inflation, and economic growth are some of the factors affecting mortgage rates.

    What Is A Mortgage Rate?

    A mortgage rate is the interest you will pay on the money borrowed from a lender to purchase a home. You have likely already seen mortgage rates advertised by lenders as a percentage, for example, 5-year fixed at 4.70%. This percentage is the amount you will pay to the lender on your borrowed mortgage amount throughout the term of your mortgage.  

    Mortgage rates are either fixed or variable. Fixed rates are locked in over a set amount of time, known as a term (typically 5 years is the most popular), while variable rates can go up and down with changes to your lender’s prime rate over the term. 

    An Overview of the 2023 Mortgage Market and Interest Rates

    So far, 2023 has seen one interest rate hike in January of 0.25bps, followed by two holds to the target overnight rate, currently at 4.50%. With the Bank of Canada (BoC) holding rates steady over the past two cycles, buyers feel more confident about the housing market going into spring. So far, the year is off to a strong start, with an 11.4% jump in sales activity in April, the third consecutive month of increasing sales in 2023. 

    However, more rate hikes could be coming this year if inflation gets stuck above the 2% target the BoC has set. In April, inflation rose unexpectedly to 4.4%, and it is now projected that the BoC won’t reach its 2% target until the end of 2024. 

    What Are the Factors Affecting Mortgage Rates?

    Location – geographic location and housing markets can affect mortgage rates

    You may have noticed that mortgage rates can vary depending on your location. That’s because your geographic location and the housing market in that area can impact your mortgage rates. 

    Canada is a vast country with a diverse landscape, and your location could affect your mortgage rates. If you live in a remote area with limited access to services, your mortgage rates may be higher than in urban areas. This is due to lenders viewing remote areas at higher risk for the potential difficulty in reselling the property should you ever wish to move or in the event of a downturn. 

    On the other hand, if you live in a densely populated area with a strong economy, such as a major Canadian city, your mortgage rates may be lower. Lenders may view these areas as a lower risk due to the higher demand for housing and the potential for property values to increase quickly over time. 

    The housing market can have a significant impact on mortgage rates in Canada. If the housing market is strong and there is high demand for housing, mortgage rates may be lower. Lenders may be more willing to offer lower rates to attract borrowers in a competitive market. 

    Alternatively, if the housing market is weak and there is a low demand for housing, mortgage rates may be higher. Lenders may view the market as a higher risk, requiring them to offer higher rates to offset this risk. 

    Credit Score – your credit score affects the interest rate you can get

    We all know our credit score is important. But did you know it can also affect the interest rate offered when looking for a mortgage rate? Lenders use your credit score to determine your risk as a borrower. Essentially, the better your score, the more favourable you appear to lenders because this tells them you can manage your debts and make timely payments. 

    If you have a higher credit score, you’re more likely to be considered a low-risk borrower and are more likely to be approved for a mortgage at a lower interest rate. A credit score of 680 or better will help you get a better rate since higher scores generally equal better rates. Lenders reserve the best rates available for those with credit scores above 740. 

    If you have a low credit score, you’re considered a high-risk borrower, and you may be approved for a mortgage at a much higher interest rate or even be denied altogether. If your score is too low (under 650), you will have difficulty finding a prime lender to qualify for a mortgage. In most cases, you must either work to increase your score or look for financing options with alternative lenders. 

    Property Type – is the property a single-family home, condo or multi-family?

    The type of property you buy can also affect the mortgage rates offered. For example, if you plan to buy a condo, your rate may be higher than a single-family home. Some lenders may view condos as a higher risk due to the potential for special assessments and other condo-related fees. 

    Typically single-family homes tend to have the lowest mortgage rates. Single-family homes also tend to appreciate more quickly than other properties, meaning lenders are more likely to recoup their investment should a borrower default. 

    Multi-family properties contain multiple units, such as duplexes and triplexes, or more. These properties can qualify for residential mortgage rates if they don’t exceed 5 units. If one of the units is owner-occupied, they can qualify for even the lowest insured rates. If there are more than 5 units, the building is considered commercial, and commercial mortgage rates will apply.  

    Multi-family properties are considered the highest risk to lenders as they are subject to more variables, such as tenant turnover and high maintenance costs. There is also a higher risk of loss or damage to your property due to negligence by your neighbours who live in close proximity.

    Loan Term – what length of loan are you looking for?

    Loan term refers to the time you have to pay off your mortgage. In Canada, the most popular term is 5 years. So how does the term affect your mortgage rate? Generally, each term has a different rate dictated by the bond price used to secure the rate on the lender’s side. 

    Bond yields are used as the benchmark for lenders when setting interest rates. Economic factors, such as inflation and economic growth, influence bond yields and mortgage rates. When bond prices rise, bond yields fall, which can lead to lower mortgage rates. When bond prices fall, bond yields rise, which can lead to higher mortgage rates. 

    5-year rates are generally more popular because they are usually priced slightly lower to make them more attractive. This provides more certainty for the lender and avoids them having to negotiate your mortgage term more often.

    Downpayment – How much money do you have saved up for a downpayment?

    The amount you have saved up for your downpayment will determine your loan-to-value (LTV) ratio and if you must also purchase mortgage default insurance. LTV is important when determining mortgage rates, as pricing depends on if the mortgage is insured, insurable, or uninsured. 

    Insured and insurable mortgage rates are generally more competitively priced as there is a lower risk of default to the lender as the insurance is government-backed. Insurable mortgages, however, will have slightly higher rates than insured mortgages since the lender pays the cost to insure the mortgage. Uninsured mortgages generally have the highest rates as the lender is solely responsible for default risk as no default insurance is available. 

    Other Factors – Any other factors to consider  

    Some other factors that may affect the rate you are offered include the property use and amortization period. 

    If you’re buying a home that you plan to live in, this is considered your primary residence. If you intend to purchase property as an investment to rent it out, you will pay a higher mortgage rate than you would if it was your primary residence. If you purchase a multi-plex where you live in one unit and rent out the others, you’ll still benefit from better pricing as your property will be considered an owner-occupied rental. The reason behind this higher rate is that lenders believe if money is tight, most people will opt to pay the mortgage on their roof (primary residence) first before any other obligations. Lenders account for this additional risk on investment properties by charging a higher rate. 

    Amortization periods on the prime lending side cannot exceed 30 years. If you are putting less than 20% down, you will only be allowed to have a maximum amortization of 25 years. If you put down 20% or more, you can go up to 30 years amortization. An amortization period of up to 25 years generally means less risk for the lender, allowing the lender to default insure the property leading to lower interest rates. Lenders view longer terms as riskier since there is more time and increasing the potential for borrowers to default on the mortgage. 

    The Steps For Choosing A Mortgage Rate

    Choosing the right mortgage rate for you involves assessing your short- and long-term needs, current financial situation and long-term goals.  

    1. Estimate your mortgage affordability

    Mortgage affordability assesses your qualifying amount and what you can comfortably afford to make as payments. This limits the maximum amount you can borrow for a property based on income, monthly and homeownership expenses. 

    Lenders will assess how much you can afford by calculating your debt service ratios. These ratios measure your ability to repay a mortgage, ensuring that total debts do not exceed a percentage of your gross income. The ratios are then used to determine how much money a lender will lend you for a mortgage. 

    2. Determine your savings requirement

    Savings requirements depend on the home’s purchase price, with a minimum of 5% required for homes priced at or under $500,000. For homes priced between $500,000 and $999,999, a minimum downpayment of 5% is required on the first $500,000 and 10% on the remaining amount. For homes priced at $1 million or more, a 20% downpayment is required. 

    A downpayment is a lump sum of money you must pay upfront when getting a mortgage to purchase a home. The downpayment amount will affect the size of your monthly mortgage payments, so consider this when budgeting how much you can afford. 

    3. Do you need a 3-year or 5-year mortgage?

    There will be a few factors to consider when deciding whether to go with a 3-year or 5-year mortgage term. First, understand how long you expect rates will stay high (or low). If rates are currently high and there is a chance they may go lower in the future, it may make sense to go with a shorter term. The opposite is true if rates are currently low and you expect they may go higher. 

    Another factor to consider is the length of time you plan to stay in the home. If you don’t see yourself living there beyond a few years, it may be better to go with a shorter duration to avoid the need to break the mortgage early. Breaking a mortgage term early can lead to hefty penalties. 

    4. Find the right type of mortgage

    There are many different types of mortgages out there, so the first choice you will need to make is whether to go fixed or variable and then decide if you want an open or closed mortgage. 

    Fixed-rate mortgages mean your rate and payment remain the same over the mortgage term. Variable-rate mortgages mean your rate could change over the mortgage term based on the lender’s prime rate. Depending on the type of variable mortgage you choose, payments will either be fixed or adjustable. 

    Open mortgages allow more flexibility to make prepayments at any time without pre-payment penalties. Open mortgages will generally have a higher interest rate for this flexibility. Closed mortgages limit how much you can prepay depending on the lender. If you pay more, then you will be charged a pre-payment penalty. Closed mortgages generally have lower interest rates due to this lack of flexibility.

    5. Understand mortgage interest rates

    Interest rates are based on several factors that are unique to each individual. To ensure you qualify for the best rates, you will need to make yourself as attractive as possible to lenders. 

    The rates you are offered are based on many considerations, including

    • Downpayment, which affects your LTV ratio.
    • Debt-to-income ratio, which reflects the proportion of debts to your income.
    • Credit score and history, which demonstrates your character to the lender.
    • Loan amount, which can come with further discounts for higher values.
    • Lenders can offer better rates depending on their costs to fund your mortgage.
    • Mortgage terms have different rates based on the bonds securing them.
    • Mortgage types have different rates due to possibly being paid off early.
    • Mortgage features as more options usually come with higher rates.

    6. Browse mortgages with Compare Mortgages 

    It can be frustrating and time-consuming to compare mortgage rates from many different lenders. That’s why we created Compare Mortgages to house all your mortgage options in one convenient location. Use our rates tool to find and compare the lowest rates in Canada, and we’ll do the heavy lifting to find your most suitable mortgage solution. 

    Frequently Asked Questions

    What is an interest rate?

    An interest rate is a fee your lender charges on your mortgage amount for your set term. This interest rate is expressed as a percentage, also known as the mortgage rate. 

    How do I know what type of mortgage rate is best for me?

    The best mortgage rate for you will be the one that meets your short and long-term goals. It’s important to not only go with the lowest rate offered but the one that is most suitable for your needs. Compare rates for various terms and speak to a mortgage expert who can help you narrow down the options that will work best for your situation.

    How does my credit score affect my interest rate?

    A credit score of 680 or higher will qualify you for better interest rates as you are more likely to be considered low-risk to the lender. The best rates are reserved for those with credit scores of 740+. Lower credit scores will mean higher interest rates since you are more likely to be considered high-risk to the lender. If your score is under 650, you may even have difficulty qualifying with prime lenders. 

    How does the size of my downpayment affect my interest rate?

    The size of your downpayment determines your LTV ratio and whether you need to purchase mortgage default insurance. The interest rates you are offered are based on whether the mortgage is insured, insurable, or uninsured. 

    Insured will generally have lower rates as the risk of default to the lender is transferred to the insurer. In comparison, insurable will come with slightly higher rates since the lender will pay for the costs to insure your mortgage to protect themselves from default. Uninsured mortgages come with the highest rates since they pose the highest default risk to the lender.

    Final Thoughts

    Choosing the right mortgage rate isn’t easy. You should now better understand the factors that could influence the mortgage rates you’re offered. To help you find the best mortgage rate for your situation, consult an experienced mortgage professional who can help you with tailored advice so you can feel confident about your decision when choosing the mortgage and the rate that’s right for you.