Everyone wants the lowest interest rate they can possibly get. The reason why is obvious. Your interest rate has a significant impact on your monthly mortgage payments. According to an Ipsos poll, 51% of Canadians fear that rising interest rates will affect their ability to pay debts, and they are right. Thousands of dollars can go towards your interest rate.
Take this example. You purchase a property for $452,382 (with a 25-year amortization period and rate of 2.95%). Your monthly mortgage payment is $2,129.29. After the amortization period, you would have paid $186,404.50 in interest rates. If your mortgage rate increases by 1%, your monthly payments go up to $2,367.37, adding an extra $71,425.93 to your total interest rate paid after 25 years. Never underestimate the total cost of borrowing.
So how is your interest rate determined? Lenders look at different factors when offering a rate. Some you are responsible for, and others are out of your control. Before you search for a home, take a second look at what can influence your interest rate. Knowing this can help you work out your budget and prepare even before you start the home buying journey.
1. The type of loan
The type of mortgage rate you choose will affect your interest rate and mortgage monthly payment. Here is a quick recap of mortgage rates.
In a fixed mortgage, the interest will remain unchanged for the term. In a variable mortgage, things a little different. The interest rate is subject to change depending on the Bank of Canada’s benchmark interest rate.
2. The Bank of Canada
Monetary policy affects us all.
The Bank of Canada is responsible for setting the benchmark interest rate for all lending institutions depending on economic conditions. Recently, the bank raised its overnight interest to 1.5%, an increase of a quarter point.
With an interest rate hike, all mortgages and your payments are affected. In fact, 43% of Canadians agree that after a rate hike, they can feel the effects on their personal finances. Rates increase for home buyers, those renewing their mortgage and those with a variable rate.
3. Credit score
Your credit score is one factor you can control. It indicates the likelihood of the mortgage loan being repaid by the borrower by considering your payment history. The higher the score, the better.
It shows your lender that you are trustworthy and that you won’t default on payments. You paid your bills on time and did not overuse your credit, and for that, you will be compensated with a lower interest rate. If you showed your lender risky behaviour, you would get a higher interest rate. Always check your score to see if it needs work before buying a home.
4. The down payment
Here’s a general rule: the larger the down payment, the lower the interest rate. There is less risk for a lender when you have to borrow fewer funds. Aim for a down payment of 20%.
5. Economic conditions
Lenders consider the economy when offering interest rates. If the economy seems to be heading in the direction of inflation, interest rates can go up. With inflation, money becomes less valuable and lenders will look to compensate for the monetary value they lost.
The economy doesn’t change from one day to the next. Shorter terms usually have lower interest rates since economic conditions are more predictable. On the other hand, with a longer term, interest rates can be higher. Lenders like to be ready for whatever the future might hold.
It is always good to know what factors influence your interest. Always prepare and do your research before you search for a home to save on interest costs. Shop for mortgage rates with Homicity and find the best rate for you. Filter based on term, amortization and transaction type.