The Mortgage Rate Triangle – How To Ensure you Get the Best Mortgage Rate Possible
Factor #1: Timing Your Closing Date
Whether you are purchasing, refinancing or renewing a current mortgage, your closing date has a significant impact on the interest rates that will be available to you. Why is this?
In the mortgage industry, lenders compete for business by offering quick close specials. These are special deals that are available in 30, 45 and 90-day windows. Quick close specials can end or begin at any time, and can offer a borrower up to a 15 basis point (.15%) reduction in interest rate. This equates into significant savings. On a $500K mortgage a borrower can save up to $3500 in interest over a 5-year term, with a .15% interest rate discount.
What’s the best way to take advantage of these quick close specials?
If you’re purchasing: Consult your broker before writing the offer, and ask if there is any quick close specials that should determine when you create your closing date.
If you’re renewing: Consult your mortgage broker when you receive your renewal notice. (Usually 120 days out). Since you can’t change your renewal date, your broker will be able to advise you on the current rate environment (if rates are going up or down) and advise on whether it would be better to get a deal going sooner or wait a bit closer to closing to see if any quick close specials pop up.
If you’re refinancing: Consult your broker to best time the date of your refinance. Some quick close specials don’t apply to refi’s, but determining the rate environment at the time of refinancing can still have a hugely positive impact on your bottom line.
Factor #2: Your Borrowing Profile
Risk is a common theme in the lending industry, and has a correlative effect on the cost of borrowing. Where risk is higher, interest rates are also going to be higher. Similarly, where risk is lower, interest rates will follow.
Lenders assess your borrowing risk with your credit report. The credit report will give the lender a beacon score – a simplified number that summarizes your borrowing history. If you have a beacon score under 620, you will be paying higher interest rates – no questions asked. If your beacon score is above 680, this may allow you to access special interest rate offers from lenders looking to fill their portfolio with low-risk mortgages.
Similarly, if you are good at keeping your credit card and line of credit debts down, lenders commonly offer specials to borrowers that can qualify under tighter debt servicing ratios. These specials sometime provide a good incentive to refinance your mortgage to consolidate debts, there-by lowering your debt service ratios.
In addition, if you are purchasing, your down payment size has an appreciable impact on the interest rate you will pay. Although this may seem backwards, high ratio mortgages often get better interest rates by about 10 basis points (.10%) The downside to this is that the borrower is paying a hefty mortgage insurance premium – which will no doubt outweigh the savings in interest.
Factor #3: The Property
There are several aspects to a property that will determine what kinds of interest rates are available:
- Is the property in a major urban centre? If yes, a borrower will have access to most lenders, and the best mortgage rates. If the property is in a small town, say for example, Port Renfrew – a borrower may be limited to a few specific lenders that are willing to borrow in that location – thus limiting the borrowers to those lender’s interest rates.
- Is the property a rental property? This will often result in a 5-10 basis point rate premium.
- Is the property a coop? Many lenders will not lend on cooperative housing units – leaving the borrower a limited set of choices when it comes time to getting a mortgage.
- Is the property a farm, hobby farm or semi commercial in nature? Any property where the property itself offers a source of income (other than rental suite income) is very difficult to get a residential mortgage for. There are a select few lenders that will allow hobby farms, but be prepared to prove your property isn’t earning you significant income.
- Has the property ever been a grow op before? If so, your chances of getting a mortgage are slim to none.
- Has the property been on the market forever? If so, you should be prepared to make a larger than normal downpayment (25-30%). Most lenders will not touch properties that are not deemed ‘prime marketable properties’.
Moral of the Story:
Your mortgage broker should be an important part of your purchasing, renewing and refinancing plans – not just someone you visit after all the plans are set in stone.
And as a real world example, a 45 day quick close just crossed my desk just now. 5 year fixed @ 2.39% (high ratio only) (Pretty good deal)
A little time spent on planning with your mortgage broker can save you some serious cash.
Mike Grace is an independent full-time mortgage planner and industry insider located in Victoria, BC. If you are purchasing, refinancing or renewing your mortgage, contact Mike to obtain the best available rates and terms.