How to get the best mortgage rates in Canada – seven tips

There is one overriding theme…

How to get the best mortgage rates in Canada – seven tips

When you buy a home, you must take into account not only the amount borrowed, but the interest rate. What appears to save you money in the present moment may end up costing you tens of thousands of dollars over the longer term. Therefore, it is critical that you look for the best mortgage rate you can find. Here are seven tips that will help secure your dream home.  

Check your credit score

If you want to get the best mortgage rate in Canada, one good tip is to check your credit score. The reason for this is that if you can convince a lender that you are a low risk, you will score a low rate. By checking your credit score, you can take steps to raise it like repaying certain debts to achieve a lower debt-to-income ratio. Remember: lenders are only interested in borrowers repaying mortgages. With a credit score hovering around 700-750, your lender would feel comfortable enough to give you a better deal.

While improving your credit score can be a lengthy process, you can do it by making larger payments on your outstanding credit card bills, keeping outstanding balances on credit cards on the lower side, ensuring all your bills are up-to-date, and paying off any collections that are on your credit report.

Shop, shop, and shop around and compare rates

It is especially important not to take the first loan from the first company you speak with. But remember that since every application counts as a hard pull on your credit score, it is also important that you do not make multiple applications. This is where it would benefit you to inquire with an online broker or a mortgage broker, because they are able to shop around for you. Mortgage brokers and online brokers can look into any number of lenders to suss out the best deals and your credit history will only get pulled one time.

When shopping around, it is also a good thing to keep in mind that varying loan types offer varying interest rates. Fixed-rate loans, for instance, have higher rates than variable-rate mortgages. Because you will be responsible for your mortgage interest rate for years, it is important to make a choice that will save you the most amount possible during that period.

Consider your present length of employment

Having the same employer for two years or more is the best time to apply for a mortgage—and not before. It should be noted that lenders will treat you more favourably if you’re employed by a company rather than if you are a freelancer or self-employed, for instance. For this reason, if your spouse is employed by a company and you are not, you will likely receive a far better rate if the mortgage is taken out in your spouse’s name and not yours.

Put down at least 20% of the home’s cost

While mortgages do exist that require a smaller down payment—in the area of 5% for homes worth $500,000 or less, for example—you can lower your interest rate if you put down at least 20% of the price of the property. Your interest rate could be higher, and you could be on the hook for mortgage default insurance, or CMHC insurance, if your down payment is under 20%. This decision could ultimately increase your total cost.

Decrease your debt-service ratio

Your debt-service ratio is the percentage of your gross income each month that you use to repay your debts. When you borrow money, lenders use your debt-service ratio to evaluate the risk you carry. For this reason, you should keep your Gross Debt Service—which is your housing costs covered by your monthly household income—under 39%, and your Total Debt Service below 44%.

If you want to decrease your debt-service ratio, you should make higher payments on your debuts, increase your income, or reduce debt by buying things you know you have the cash to afford. Each of these signals to lenders that you are a lower risk.

Use cash reserves

To make sure you have enough money saved up to pay your mortgage in the event you lose your job, lenders will look at your savings account. To make sure you are less of a risk, lenders prefer seeing multiple months worth of mortgage payments saved in your bank account. It will also signal to lenders that you are responsible financially. It is a good reason to save for up to four months’ worth of mortgage payments—and ensure that you get a good mortgage rate.

Increase your income stability

Lenders will see that you are less likely to default on your mortgage if you have increased income stability. To improve your income stability, you can give yourself an assessment of how much you spend each month versus how much money you earn. By doing this, you will be able to see more clearly various ways you might earn more and spend less. Requesting more hours at your current job, seeking out freelance or part-time work, and cutting out needless spending are all ways to increase your income stability—and make you more attractive to lenders.