How to find the best mortgage rate

Finding favourable mortgage terms is an essential aspect of any real estate project. With the help of a mortgage broker, shopping for different lenders to find the best mortgage rate will become much easier!

Buying a property is probably the biggest investment of your life. In Canada, mortgages are generally spread over a long-term amortization period of 20 to 25 years. Since this is such a long period, it is important to secure the most ideal conditions.

Many borrowers believe that mortgage interest rates are non-negotiable. That’s completely untrue! Depending on the type of mortgage you choose, the frequency of repayments, and the length of the amortization period, you can adapt your mortgage according to your needs.

Shop to find the best interest rate for your real estate loan

There is no shortage of lending institutions, but it's still essential to find a rate that works to your advantage. The solution? Shop around different financial institutions to compare the terms they offer. This is a crucial step to take before signing anything, as the agreed terms will stay with you for many years to come.

However, it is impossible to deny that information on mortgages can be difficult to comprehend. This is why many people tend to take the easy way out by  applying for a loan directly from their current banking provider. However, this solution is not the most economical and could lead to increased debt.

To help you understand more clearly, here are the different aspects to consider when looking for a favourable mortgage.

An open mortgage or a closed mortgage - which to choose?

The first question to ask yourself is definitely which type of mortgage to choose.

It should be noted that an open mortgage is characterized by a shorter term and a higher interest rate. You will have the option to repay your loan at any time, in full or in part, without any penalty. This gives you more flexibility and allows you to tailor your payment terms to match your repayment capacity. This is the ideal option for people who expect a large influx of money in the short-term, such as from the sale of a house or the acquisition of inheritance.

A closed mortgage, on the other hand, implies a lower interest rate over a longer period. You will have to pay a fixed amount for the duration of the mortgage. You won't be able to increase your payments so that you can pay it off faster, as the financial penalties for early repayment are fairly significant for closed mortgages. Nonetheless, you will have peace of mind and more time to repay the amount owed.

A fixed or a variable rate?

Your choice of mortgage rate will be relative to your tolerance to risk and uncertainty.

The variable rate follows the curve of the financial market. Although this rate is generally lower, it implies that monthly mortgage payments will be adjusted up or down depending on the market and the fluctuation of the prime rate.

What's the advantage of this rate? It means you will pay less on a monthly basis each time the current rate decreases. However, there is always a risk that this rate will rise during a weak financial period. For example, between 2000 and 2010, the Bank of Canada's key interest rate fluctuated between 0.25% and 6%.

A fixed rate, meanwhile, ensures that you pay fixed monthly repayments during a given period (often 5 years). This is a guaranteed rate whereby it is frozen and cannot be changed. Obviously, a fixed rate will be higher than a variable rate given the security it provides. However, this is the best option if you wish to simplify your financial planning.

For more information, see our article "Mortgage loan: should you choose a fixed rate or a variable rate?"

Determining the frequency of your repayments

Do you really think the frequency of repayments doesn’t have any impact on your mortgage? The reality is you could generate significant savings on interest payments if you plan your repayments properly.

There are several types of repayments:

• Monthly mortgage repayment: debited each month on the same date. You make 12 payments per year.
• Bi-weekly mortgage repayment: debited every 2 weeks. You make 26 payments per year. Many opt for this option, which coincides with their pay period
  • Calculation: monthly payment x 12 ÷ 26.
• Accelerated bi-weekly mortgage repayment: same as bi-weekly repayment, except the amount will be slightly higher.
  • Calculation: monthly payment ÷ 2.
• Weekly mortgage repayment: taken each week on the same date, i.e., 52 weeks per year.
  • Calculation: monthly payment x 12 ÷ 52. 
• Accelerated weekly mortgage payment: same as weekly repayment, except the amount payable will be slightly higher.
  • Calculation: monthly payment ÷ 4.

Here is an example to demonstrate this:

A person takes out a mortgage of $200,000, with a fixed rate of 3.5% over a 25-year term. The monthly repayment amount will be set at $1,000. If this person opts for a regular weekly repayment schedule, the payment will be $230.77 per week. If they choose an accelerated weekly repayment schedule, the payment will be $250 per week.

The individual will pay an additional $19.23 each week when choosing the accelerated weekly repayment option, saving them $13,000 in interest over a 25-year period. Now that's food for thought!

Calculating the amortization period of your mortgage

The amortization period can often be confusing for new buyers, who mix it up with the mortgage term. There is, however, a difference between the two!

In fact, the length of the mortgage term varies between 6 months and 10 years. Once this period is over, you will need to renegotiate the clauses of your mortgage if you have an outstanding balance. Most homeowners have to renew their contract 4 to 5 times before being able to pay off their debt.

The amortization period, on the other hand, represents the total time (up to a maximum of 25 years) to repay the entire loan. The logic is that the longer your amortization period, the more interest you will pay, hence the need to negotiate the best rate.

It is essential to calculate the amortization period when buying a house. Choosing an amortization period that's too short can lead to you paying monthly installments that are simply too high, reducing your quality of life. On the other hand, an overly lengthy amortization period will result in you paying unnecessary amounts of interest.

Hire a mortgage broker to get the best rate

In order to have every chance of finding the best rate and type of mortgage for you, it would be very wise to hire a mortgage broker. Mortgage professionals will shop around to find you different rates according to your needs. They will also be able to explain all the subtleties of the system in order for you to save as much as possible and avoid potential pitfalls along the way.

A mortgage broker will not cost you anything, as they are paid on commission by the bank you choose. This way, you can benefit from the free advice and recommendations of a real expert in the field.

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