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  • Writer's pictureDave Fullerton

The Rate Debate

"What is the interest rate?"

A common question when considering a mortgage, but one that many get hung upon. The problem is that most forget to read the rest of the contract.

And so, the rate debate continues!

The mortgage rate debate is a hot topic in the world of mortgage contracts. When looking at different options, it's easy to get caught up on one thing - like what kind of term will be best for me? But if you don't consider all other factors, the calculated rates could be a disadvantage later when interest rates change!

So keep your eyes peeled. Every little detail counts (especially those pesky hidden costs).

Before we get into these other factors, let's talk about the rate. While not the only factor, it remains an important decision criterion within any mortgage.

Variable Vs. Fixed

There are two types of mortgage rates: fixed and variable. Fixed-rate mortgage interest rates stay stable for an entire year. In contrast, variable ones can go up or down based on market conditions like inflation and unemployment in different countries worldwide.

If unsure of the specifics behind each type, read our blog post for more explanation.

Beyond Rates

When considering your mortgage, other factors such as penalties can be important for deciding on a mortgage product. If you are considering two contracts, say a 1.65% interest fixed rate and a 1.95% interest variable rate, it seems like it is a pretty easy decision.

But what about the ability to make extra payments? And what are the penalties?

It's easy to think that nothing will change throughout your 5-year mortgage, so you probably haven't considered the penalties. But when looking at fixed versus variable rates - there can be different consequences. Fixed rates often come with an IRD calculation that considers changes in market conditions over time, and they're more likely to increase. Variable rates typically charge three months' worth of setting date interest.

It is essential because nearly 70% of fixed mortgages are broken before the term ends. Fixed-rate mortgages are okay when the penalty is your contract rate versus the Benchmark rate. However, when penalties are based on the Benchmark rate (sometimes called the Bank of Canada rate), it is typically much higher than your contract rate, resulting in more significant penalties.

In some cases, penalties for breaking a fixed mortgage can sometimes be two to three times higher than a variable rate. However, while the interest rate is lower, lower penalties are sometimes best should anything happen down the line.

Conventional vs. High-Ratio Mortgages

Another consideration beyond the interest rate is whether you will have a conventional or a high-ratio mortgage. We recommend putting a 20 percent down payment on a new home, resulting in a conventional mortgage. However, not everyone can do this, meaning many buyers will have a high-ratio mortgage product.

So, what does this mean?

High-ratio mortgages must be insured by either Genworth Financial, the Canada Mortgage and Housing Corporation (CMHC), or Canada Guaranty. It is due to the Bank Act, which will only allow financial institutions to lend up to 80 percent of the home's purchase price without mortgage default insurance. Insurance on the mortgage is essential to protect the lender should you default on payments, leaving the insurer to deal with the borrower.

To understand defaulting better, refer to our blog post.

The difference between conventional and high-ratio mortgages is that high-ratio requires insurance, resulting in an insurance premium. The premium is added to the monthly mortgage payment. Thus, it is essential to consider your monthly payments.

All high-ratio mortgages must have insurance, but some homeowners with a conventional mortgage may choose to pay for insurance to get a better rate.

Smart Questions to Ask Instead

To ensure you better understand your mortgage contract, and not just the interest rate, we have recommendations for a few questions to ask before you sign.

  • What is my interest rate? How can I qualify for a better one?

  • Do you recommend a fixed or variable rate?

  • What are the penalties for breaking my mortgage?

  • Are there any pre-payment penalties?

  • Will I require mortgage insurance? If so, what are the premiums?

  • What will my monthly payment be?

  • Is my mortgage portable?

These are just a few examples of good questions to ask. It is essential to do your research and be diligent with any contract you sign.

Contacting us at Front Door Mortgage can be an excellent first step. We will help answer all the questions above and any others you have on the way to becoming a homeowner.


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