Interest rates have risen rapidly this year, triggered by the Bank of Canada’s efforts to curb inflation. And the July MNP Consumer Debt Index found that 59% of Canadians “are already feeling the effects of interest rate increases.”[1]
Why has the impact been so widespread? In part, due to the rising popularity of variable rate mortgages. According to the Canada Mortgage and Housing Corporation, in the latter half of last year, the majority of mortgage borrowers opted for a variable over a fixed interest rate.[2]
Variable mortgages are typically pegged to the lender’s prime rate, which means they are immediately affected by rising interest rates. Homeowners with fixed mortgages aren’t impacted as quickly because their interest rate is locked in, but they will face higher rates, as well, when their mortgages are up for renewal. And many homebuyers are finding it increasingly difficult to afford or even qualify for a mortgage at today’s elevated rates.
Fortunately, there are steps you can take to strengthen your position if you have plans to buy a home or renew an existing mortgage. Try these eight strategies to help secure the best available rate:
1. Raise your credit score.
Borrowers with higher credit scores are viewed as “less risky” to lenders, so they are offered lower interest rates. If your credit score is low, take steps to improve it, like paying down revolving debt and making all future payments on time.[3]
2. Keep steady employment.
When you apply for a mortgage, lenders will review your employment and income over the past two years. If you’ve earned a steady paycheck, you could qualify for a better interest rate.[4] A stable employment history gives lenders more confidence in your ability to repay the loan.
3. Lower your debt service ratios.
Even with a high credit score and great job, lenders will be concerned if your debt payments are consuming too much of your income – and you may have trouble passing a mortgage stress test. If your ratios are too high, you can take steps to lower them, like purchasing a less expensive home or paying down credit cards and auto loans.[5]
4. Increase your down payment.
Why do lenders care about down payment size? Because borrowers with significant equity in their homes are less likely to default on their mortgages. That’s why you will be required to purchase mortgage default insurance if you put down less than 20%.[6]
5. Weigh interest rate options.
Not all mortgages are created equal. With a fixed-rate mortgage, you’re guaranteed to keep the same interest rate for the entire life of the loan. The interest rate on variable-rate mortgages will rise or fall along with your lender’s prime rate. Variable mortgages typically offer lower interest rates to start but run the risk of increasing.[7]
6. Compare loan terms.
A mortgage term is the length of time your mortgage agreement is in effect. A shorter-term mortgage (5 years or less) will typically feature a lower interest rate than a longer-term mortgage.[8] But, to find the best rate, you’ll need to compare your options at the time of purchase or renewal.
7. Get quotes from multiple lenders.
When shopping for a mortgage, be sure to solicit quotes from several different lenders or brokers to compare the interest rates and fees. And don’t forget that we can be a valuable resource during the process. After a consultation, we can connect you with loan officers or brokers best suited for your situation.
8. Ask for a discount.
When shopping for a mortgage, don’t be afraid to negotiate. In Canada, it’s commonplace for lenders to discount their advertised interest rates, which are called posted rates. And in many cases, all you have to do is ask. Of course, the strength of your application will come into play here – so don’t neglect strategies 1 through 4 above.[9]
Getting Started
Higher interest rates have made it more expensive to finance a home purchase. But they have also ushered in a more balanced market for buyers – with increased inventory and less competition. If you have questions or would like additional information about buying or selling a home, reach out to schedule a free consultation. We’d love to help you navigate this shifting market and reach your real estate goals!
Sources:
2. Global News
4. RATESDOTCA
5. NerdWallet
9. NerdWallet