My phone rings, chat bubble bubbles, or my email dings ... "what's your best interest rate?" asks the caller. I scratch my head, as at this point I know nothing about my caller, the property or their needs. This article's aim is to shine a light on this question from the mortgage-lending side of the fence and delve into what it takes for a mortgage professional to be able to accurately answer your question.
If I asked you, "what's the price of a yellow car?," I suspect you'd think about it then say something like, "well, that depends whether you are dealing with a Ferrari or a Mazda!" Then you'd likely need to know year, make, model, odometer, condition, location, history, etc. before you could even hesitate a guess as to the price.
And the same goes for the world of mortgage finance. Rate depends on you, your income, your credit use and repayment history, your available down payment or equity, and the property type, location and intended use. It also depends on how long you need to borrow the money for and whether you want the rate fixed or floating.
Let's talk about property types for a moment with an example - let's assume you are interested in financing a house on an acreage greater than 10 acres. Many/most residential lenders will not lend on this property type, so their advertised mortgage rates for city houses are irrelevant. Of the lenders that WILL lend on acreage properties, the next step for a mortgage broker is to determine whether you meet the lenders' income, credit and down payment criteria. If you meet their criteria in every regard, we have a match and can add that lender, along with their rates and terms, to the short-list! In that regard, the best mortgage rate is actually the best interest rate that **you** can get for the term you need from the lenders that will consider you and your property.
Here is a link to questions lenders always need answers to and a good starting point for a borrower who wants to know in advance what properties and loan amounts are within reach.
So how do you determine the best interest rate? Here's my advice:
To discuss potential mortgage interest rate, terms, and payments, you want to first have a mortgage pre-assessment discussion with an experienced mortgage professional and let them know your situation. In my practice, this is a "quick 'n' dirty" 10 minute telephone conversation where I would want to ask you questions about your location, property objectives, price range, available equity or down payment, likely credit history, employment details, and explore for any issues that might make a mortgage approval difficult (foreclosure, CRA back taxes, unresolved separation/divorce, poor credit, unemployed, newly employed, too much debt, property-type, etc.). Typically in 10-15 minutes, you and I will have a pretty good idea what is doable, the most mortgage amount that you could likely be approved for, payments at difference price-points, and I would already be thinking about which lenders would likely be on your short-list. Sometimes a borrower - now armed with new knowledge - has to re-adjust their plans, expectations, or timing. Sometimes all appears good, and a borrower can consider if they want to take the next step, which is a mortgage pre-approval.
A mortgage pre-assessment discussion is a good start, but please keep in mind that the devil is in the details, as the saying goes. If you really want to be confident in your ability to be approved for a mortgage - say before you start looking at houses - the next step should really be a mortgage pre-approval where you are asked to provide an application and copies of the application support documents that a lender will ultimately want to review. In my shop, we generate for you a detailed list of the documentation we expect lenders will likely ask for based on our pre-assessment discussion. It can take a bit of work on your part to collect the information, but once collected the bulk of your work is over, and we can review your complete file in detail along with your credit report and provide accurate answers as to likely interest rate. If there is any uncertainty or clarity we need, we will reach out to target lenders and discuss your situation specifically. We can even lock in an interest-rate, if you are concerned with rising rates (although rate-locks are seldom as aggressively priced as rate specials available for 'live' deals, and yes there are lenders competing for your business!). A final word - if you haven't provided an application and support documents to a mortgage professional for review along with permission to access your credit report, you have NOT been mortgage pre-approved.
Lowest life-time cost of a Mortgage or Lowest Rate?
So do you really want the lowest interest rate, or are you actually after the lowest life-time cost of your mortgage? That's a pretty heavy thought for many... let me explain. The average mortgage borrower goes about 2 to 3 years before something happens and they want to make a change that may impact their mortgage. Perhaps they want to move to a different property, consolidate some debt, borrow for some renovations, break up with a partner, or maybe you simply want to make some significant extra payments against the mortgage balance. Every time you make an unplanned change, extra costs can invariably arise that will add to the lifetime cost of your mortgage. For example, a change may give rise to a requirement for a new property appraisal, another lawyer fee, new CMHC fees, a big payout penalty if you have to break the mortgage, or a potential discharge/transfer fee if you move to a different lender. Lenders offer super low "teaser" rates, but these same lenders will more than recover the lower interest earned by loss of flexibility on your part hence big break penalties and fees.There are so many games that lenders play!
In the end analysis, if you are actually trying to get the lowest life-time cost of you mortgage, my two bits is that a relationship with an experienced mortgage broker who asks the right questions, knows where you are headed, and knows the games that lenders play, is going to save you the most in the long run, and in that regard get your the best mortgage. Rate is important, but there is a lot more to it than just the lowest interest rate. If you are looking for a good mortgage adviser that you can call on any time, please feel free to contact us.