Mortgage Basics

How to Effectively Compare Mortgage Interest Rates in Canada

How to Effectively Compare Mortgage Interest Rates in Canada
Written by
  • Ashley Howard
| 21 December 2023
Reviewed, 3 January 2024

Table of contents

    When buying a home or refinancing your mortgage in Canada, the interest rate is one of the most critical factors to consider. But with so many options available, how do you effectively compare mortgage interest rates? 

    Compare Mortgages understands that finding the best mortgage interest rate is essential for your financial well-being. That’s why we’ve compiled this guide to make your comparison process as smooth as possible. We want to provide you with the knowledge you need to save money in the long run.

    Key Takeaways

    • The Bank of Canada influences the economy and interest rates by controlling its policy rate, which directly affects variable rates and indirectly affects bond yields and fixed rates. 
    • The rate offered should be considered alongside benefits and features between comparable mortgage solutions.
    • A down payment of less than 20% will provide you with the lowest rate but will increase the total cost of your mortgage.

    Understanding Mortgage Interest Rates

    To effectively compare mortgage interest rates, you must first understand how they are determined in Canada. Several factors influence the mortgage rates you are offered, including the Bank of Canada’s policy interest rate, bond yields, lender guidelines, and your creditworthiness.

    The Bank of Canada’s policy interest rate is the benchmark influencing lenders’ variable and adjustable rates. When the central bank increases this rate, it becomes more expensive for lenders to borrow, resulting in higher mortgage rates. Conversely, lenders can offer lower mortgage rates when the central bank lowers the key interest rate.

    Bank of Canada bond yields are the benchmark influencing lenders’ fixed rates. When bond yields rise, fixed rates increase as well. When bond yields fall, fixed rates are slower to fall due to lenders’ pricing in risk should bond yields take a turn and start climbing again. 

    Lenders play a role in determining their mortgage rates using their internal risk assessment model. Each lender sets its prime rate based on a range. Prime lenders will keep their prime rate the same as the Big 6 to remain competitive in the mortgage industry.

    Know that your creditworthiness will affect the interest rate you qualify for. Ultimately, the better the score, the less risky you are to a lender.

    Top Factors to Consider When Comparing Mortgage Interest Rates

    While interest rates are important since they dictate how much you will pay on your mortgage, there are other factors to consider besides comparing mortgage rates in Canada. These factors include the terms of the mortgage, prepayment privileges, and penalties for breaking the mortgage contract.

    The mortgage term refers to the time you commit to a specific interest rate or discount with a  lender. Shorter-term mortgages may have lower interest rates but require more frequent renewal. On the other hand, longer-term mortgages offer stability, especially on a fixed interest rate for an extended period.

    Prepayment privileges allow you to make extra payments towards your mortgage, reducing the overall interest paid and shortening the amortization. Some lenders offer more flexibility with prepayment privileges than others, so it’s crucial to consider this when comparing.

    Penalties for breaking the mortgage contract can be significant if you refinance or sell your home before the term ends. Different lenders have varying penalty structures, so it’s essential to understand these penalties and consider them when comparing mortgage rates.

    The Difference Between Fixed and Variable Interest Rates

    When comparing mortgage interest rates, you’ll come across two rates: fixed and variable. Understanding the difference can help you choose the right option for your financial situation and goals.

    A fixed interest rate remains the same for the entire mortgage term. This option offers stability and allows you to plan your budget effectively. However, fixed rates mean you could miss out on lower rates should interest rates fall during your term.

    Variable and adjustable interest rates, on the other hand, fluctuate based on changes to your lender’s prime rate and the Bank of Canada’s key interest rate. This option can result in savings if interest rates decrease, but it also carries the risk of rates increasing over time. It’s prudent to understand that when comparing variable or adjustable mortgage rates, you’re comparing discounts from the lenders’ prime rate, and those rates can change with changes to the BoC policy rate at any time – even if the discounts remain constant.

    How to Calculate the Total Cost of a Mortgage

    Comparing mortgage interest rates goes beyond looking at the rate alone. To determine the total cost of a mortgage, you need to consider other aspects, such as the amortization period, payment frequency, and mortgage insurance.

    The amortization period is the length of time it takes to repay the entire mortgage. A longer amortization period results in lower monthly payments but higher interest costs over time. Shortening the amortization period can save you money in interest, but it also means higher monthly payments.

    The payment frequency determines how often you make mortgage payments. Choosing an accelerated payment frequency, such as bi-weekly or weekly, can help you save on interest and pay off your mortgage faster.

    Mortgage default insurance is required for homebuyers who put down less than 20% of the home’s purchase price are obligated to obtain mortgage default insurance. This form of insurance shields the lender in the event of non-payment but comes at an additional expense to the borrower’s mortgage. It’s important to factor in this cost when comparing mortgage rates. However, the updated guidelines from the federal regulator will allow you to switch and transfer an already-insured mortgage at a contract rate upon maturity.

    Researching and Comparing Mortgage Lenders

    To effectively compare mortgage rates, it’s important to research and compare different lender offerings. Look for lenders specializing in mortgages with a good reputation in the industry.

    When comparing lenders, consider their interest rates, fees, customer service, and mortgage options. Look for online reviews or ask friends and family for references if they had a positive experience. 

    Utilizing Online Mortgage Rate Comparison Tools

    The internet provides many resources to help you compare mortgage rates effectively. Online mortgage rate comparison tools allow you to input your information and receive quotes from multiple lenders. These tools streamline the comparison process, making it easier to evaluate different mortgage options. When using online mortgage rate comparison tools, provide accurate and up-to-date information. This will ensure that the quotes you receive reflect your current financial situation. 

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    Seeking Professional Advice From Mortgage Experts

    Need a hand with finding a mortgage rate that works for you? There are experts in the industry who can help you navigate the complexities of mortgage rates and find the best deal for your specific needs.

    A mortgage expert works with multiple lenders and has access to a wide range of mortgage products. They can analyze your financial situation, recommend suitable mortgage options, and negotiate on your behalf. Mortgage experts are paid by the lender, so their services are often free for borrowers.

    Negotiating Mortgage Interest Rates

    Don’t be afraid to negotiate with lenders when comparing mortgage interest rates. While the advertised rates are a starting point, many lenders are willing to negotiate to secure your business. Factors such as your creditworthiness, down payment, and relationship with the lender can influence your negotiating power.

    Prepare for negotiation by researching current market rates and obtaining rates from different lenders. Use this knowledge to negotiate for a better rate or more favourable terms. Remember, even a small reduction in your interest rate can result in significant savings over the life of your mortgage.

    Additional Fees and Charges to Consider

    When negotiating rates, consider any additional fees and charges associated with the mortgage. These fees include appraisals, legal, title insurance, and mortgage registration fees. These fees can vary depending on the lender and the province where the property is located. 

    The inclusion of these fees is referred to as the annual percentage rate (APR) rate. APR includes any fees and loan interest you’re expected to pay, while the annual interest rate (AIR) does not and is just the interest rate. APR will always be the same or higher than AIR but will give you more of a true cost of borrowing.

    While these fees may not directly impact the interest rate, they contribute to the overall cost of the mortgage. It’s important to factor in these fees when comparing mortgage rates to get a clear picture of the total cost. 

    Frequently Asked Questions

    How can I estimate monthly mortgage payments?

    The easiest way to estimate your monthly mortgage payments is to use a mortgage payment calculator.

    Does inflation affect mortgage rates?

    Yes, the Bank of Canada uses the policy rate to manage inflation and keep it within a target of 2%. If inflation is high, the policy rate is increased to control inflation, which will mean a higher interest rate on variable and adjustable mortgages. If inflation falls below 2%, the policy rate is lowered to encourage borrowing, meaning lower interest rates for variable and adjustable mortgages. 

    Speculation in the market and changes in the policy rate can also cause bond yields to respond and fluctuate, going up or down. If bond yields rise, fixed mortgage rates will typically increase; if bond yields fall, fixed mortgage rates will decrease. 

    How do I get the lowest rate?

    The lowest rates are typically reserved for insured mortgages, requiring you to put down less than 20% and purchase mortgage default insurance.

    Final Thoughts: Making a Decision on Mortgage Interest Rates

    By understanding the factors influencing mortgage rates, considering various lenders, utilizing online tools, and seeking professional advice, you’ll be well-equipped to compare and choose the best option for your unique situation. Consider the overall cost of the mortgage, the mortgage rates offered, and any additional fees before making a decision.

    At Compare Mortgages, we are dedicated to helping you find the best mortgage rate in Canada. Our user-friendly tools and expert advice will empower you to make informed decisions that will save you money over the long run. Take the time to compare rates, seek our guidance, and consider all aspects of the mortgage before committing. With us negotiating on your behalf, you’ll be on your way to securing a favourable deal for your home purchase or refinance in Canada.