Mortgage rates

If you're buying a home, take the time to get to know what kind of mortgage rates are available.

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Buying a home can be like learning a new language. The new lingo, concepts and sheer variety of mortgages and rates can be a lot to wrap your head around. When you’re ready to buy a home, you want to get the best mortgage rate to keep your monthly payment down. But what’s more confusing is that the best rate might not even be the lowest rate.

Let’s take a look at what kind of mortgages are out there and how can you get the best rate for your needs.

Mortgage rates in Canada

Mortgage rates in Canada are quite low compared to other countries, which means borrowers can benefit from borrowing relatively cheap money. As of September 2019, a 5 year fixed-rate mortgage offered by one of the big banks sits between 2.39% to 3.14%, while a 5 year variable rate sits between 2.74% to 3.95%.

These are rates offered by banks only, and some nontraditional online mortgage lenders may have lower rates.

How are mortgage rates calculated?

By law in Canada, interest on fixed-rate mortgages is compounded semi-annually, or twice a year. During this time, any unpaid mortgage interest is added to the principal amount, which then earns interest on itself. You should note that your quoted APR and your actual APR may differ slightly because of compounding – with your actual APR being slightly higher than the quoted APR. As a general rule, the more often a mortgage is compounded, the higher the interest will be.

If you have a variable rate mortgage, compounding varies and it’s much harder to calculate since your interest payments will fluctuate based on the market. One month your interest rate might be 2.5% and the next it could be 2.6%, which will ultimately affect how much you pay in interest.

When you first start out paying your mortgage, you’ll be paying more toward interest and less toward your principal balance. But as each month passes, your principal would be less, meaning you’ll pay less toward interest and more toward your principal balance.

Did you know

You don’t have to settle for a monthly payment on your mortgage. You can pay weekly or bi-weekly and pay down your mortgage faster – and cheaper. Paying your mortgage off weekly or bi-weekly allows you to pay about a months’ worth extra of your mortgage each year.

What are the different mortgage rate types?

If you’re ready to start looking for your new home, explore the different types of mortgages and interest rates out there and see what works best for you. The most common types of mortgage rates are fixed-rate and variable, but there are other types that we will discuss below.

Fixed-rate mortgages

Fixed rate graph

Fixed-rate mortgages are the most popular type of mortgages in Canada, with most people opting for these since you can lock in an interest rate for anywhere from six months to 10 years. Your rate and payments won’t change over your agreed term, giving you the security of consistent mortgage payments you can easily budget around. Once your term ends, you’ll need to refinance your mortgage. Your lender will offer you a new term and rate, or you can refinance with a different lender if you choose.

Read more about fixed rate mortgages

Variable-rate mortgages

ARM graph

A variable rate mortgage comes with an interest rate that fluctuates with the market. Over the course of your mortgage, your payments will rise or fall depending on the prime rate. The prime rate is set by your lender, with most lenders adjusting their prime rate when the Bank of Canada adjust their overnight lending rate. While there’s a chance that you’ll pay less interest than you would with a fixed-rate mortgage, especially for the first few years, your payments could rise later on to an amount you can’t afford.

Read more about variable rate mortgages

Combination or hybrid

A hybrid mortgage, which is also referred to as a combination or a 50/50 mortgage, is a combination of both a fixed-rate and a variable rate. Usually, half of your mortgage will be financed at a fixed-rate while the other half will be financed at a variable rate. The terms for both financing options will be different, which can make understanding your mortgage slightly difficult – but it allows you to take advantage of both types of rates.

Adjustable

An adjustable rate mortgage is reviewed periodically and is then adjusted based on the prime rate. Much like a variable rate mortgage, if the prime rate drops, your interest payments will drop and in turn your monthly mortgage payment will drop, as well as the amount you’ll pay overall for your mortgage. But on the flip side, an increase in the prime rate will result in a higher mortgage payment, higher interest and a higher overall cost for your mortgage.

Convertible

A convertible mortgage is one that gives you plenty of freedom throughout the life of your mortgage. You can typically move between a variable rate and a fixed-rate, or choose a longer or shorter term and pay no penalties for making these changes. If the prime rate is currently low but you expect it to rise in the future, this type of mortgage can help you take advantage of current low variable rates and then switch to a fixed-rate once the prime rate rises.

    Interest rates vs. APR

    When you’re looking to take out a mortgage or refinance your existing mortgage, you might see both APR and interest rates — and they’re not the same thing. The interest rate, expressed as a percentage, is the amount that you’ll pay to the lender to borrow money. The APR, which is the annual percentage rate, is usually higher than the interest rate, because it includes interest as well as additional fees that you’ll pay like origination fees and closing costs.

    When you’re shopping for a mortgage, comparing the APRs will give you a better sense of the cost of the mortgage. The higher the APR, the higher the combined cost of the fees and interest rate.

    How can I apply for a mortgage?

    Once you’re ready to apply for a mortgage, you’ll need to reach out to a bank or other mortgage lender. You’ll be passed on to an underwriter or mortgage specialist who will assess your needs and options to help you find the right mortgage for you.

    To apply for a mortgage, you’ll need to provide your lender with personal information including:

    • Your name and contact information.
    • Your income.
    • Your Social Insurance Number (SIN).
    • The address of the home you plan to purchase or refinance.
    • An estimate of the home’s value.
    • The amount you want to borrow.

    Bottom line

    When it’s time to apply for a mortgage, make sure you understand the different options available. You’ll need to determine the type of mortgage as well as the interest rate type, loan term and amortization period that works best for you. Knowing the basics can help you get the best rate for your needs – and help you save money and pay off your mortgage faster.

    Frequently asked questions about mortgages

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