Ready to Buy a Home? Here's How to Secure the Best Mortgage Rates in Canada

What Is a Mortgage?

Before diving into how to get the best mortgage rates, let's first define what a mortgage is. Unless you plan on paying for your home in full with cash, a mortgage is a loan you take out from a lender to cover the remaining cost of the property after your down payment. This loan is secured by the home itself, meaning if you fail to meet your mortgage obligations, the lender can take possession of your property.

Understanding Mortgage Terms and Amortization

When shopping for a mortgage, you'll encounter two important factors: the mortgage term and the amortization period. Both impact your total mortgage costs, interest rate, and monthly payments.

Mortgage Term

The mortgage term is the length of time your mortgage contract is in effect. Terms typically range from a few months to five years or more. Once your term ends, you’ll need to renew your mortgage, although you may not need to renew it if you've paid off the balance by that point.

Mortgage Amortization

The amortization period refers to how long it will take to pay off your mortgage in full. The longer the amortization period, the smaller your monthly payments—but the more interest you'll pay over time. In Canada, if your down payment is less than 20% of your home’s price, the maximum amortization period is:

• 30 years for first-time homebuyers purchasing a new build.
• 25 years for other buyers.

If your down payment is more than 20%, your lender will set your amortization period.

What Is a Mortgage Rate?

A mortgage rate is the percentage fee lenders charge for lending you money. The rate will depend on several factors:

• The amount you borrow
• Your down payment amount
• The type of mortgage (fixed or variable, open or closed)
• Special offers or deals from lenders

Understanding your mortgage rate is crucial because it determines your monthly repayment amount and how much interest you'll pay over the life of the loan. Your home will serve as collateral, meaning if you default on your mortgage, the lender has the right to take your property.

10 Tips to Help You Secure the Best Mortgage Rates in Canada

Here are some actionable tips that can help you secure the best mortgage rates for your situation:

1. Research Mortgage Interest Rates

Mortgage rates aren’t one-size-fits-all. Prime mortgages, for example, are offered to borrowers with a credit score of at least 670 and a solid financial profile. These loans typically come with the best rates. Subprime mortgages, on the other hand, are for borrowers with lower credit scores and come with higher rates due to the increased risk to lenders. Knowing your credit score before shopping for a mortgage will help you understand what type of rates to expect.

2. Lower Your Debt-to-Income Ratio

Your debt-to-income ratio (DTI) is a key factor lenders consider when determining your mortgage eligibility and interest rate. To improve your chances of getting the best rate, aim to keep your Gross Debt Service (GDS) ratio below 39% and your Total Debt Service (TDS) ratio below 44%. To lower your DTI, pay off existing debts, limit new borrowing, or increase your income.

3. Improve Your Credit Score

A higher credit score can significantly improve your mortgage rate. To boost your score, focus on paying down outstanding credit card balances, settling any collections, and ensuring your bills are paid on time. Keeping your credit utilization low and avoiding late payments can also help improve your score.

4. Increase Your Income Stability

Lenders want to see that you have a stable income. To increase your chances of securing a favorable rate, ensure your income is consistent and reliable. If possible, look for ways to earn more, such as taking on extra work or starting a side business, while cutting unnecessary expenses to improve your financial stability.

5. Prepare Your Employment History

Lenders typically require proof of your employment history to assess your ability to repay the mortgage. Having a strong employment track record shows lenders you’re financially reliable and unlikely to experience gaps in income.

6. Save More for a Bigger Down Payment

A larger down payment means a smaller loan, which can translate to a better interest rate. In Canada, putting down more than 20% will allow you to avoid mortgage insurance and may secure you a better rate than someone with a smaller down payment.

7. Build Cash Reserves

Lenders want to see that you have sufficient savings to weather financial difficulties. A good rule of thumb is to have three to four months’ worth of mortgage payments saved in your account. This demonstrates that you’re financially prepared for unexpected events like job loss or changes in your income.

8. Monitor Interest Rate Trends

Interest rates in Canada can fluctuate based on economic conditions. In recent years, the Bank of Canada raised rates significantly to tackle inflation, but there are signs that rates could decrease in the coming years. If you can afford to wait, buying when rates are lower could help you save on your monthly payments and reduce the amount of interest paid over the life of your mortgage.

9. Low- versus High-Ratio Mortgages

If your down payment is less than 20%, you’ll need mortgage insurance. While this can be added to your monthly payments, paying a higher down payment (at least 20%) can help you avoid this extra cost and secure a better rate. Saving more for a down payment is a smart strategy to reduce both your mortgage costs and long-term financial burden.

10. Shop Around for the Best Deal

Different lenders offer different rates and terms, so it’s essential to shop around. Compare rates, fees, terms, and conditions to find the best deal for your financial situation. Consider working with a mortgage broker who can help you navigate the options available and find the best mortgage rates in Canada. Mortgage brokers often have access to a wide range of lenders and can help you find deals that suit your needs. The best part? Mortgage brokers don’t charge borrowers for their services.

Final Thoughts: Start Your Homeownership Journey with Confidence

Securing the best mortgage rate in Canada requires a combination of good credit, a solid income, and a substantial down payment. By following these tips, you’ll be better positioned to secure a mortgage that fits your financial situation, ensuring that homeownership becomes a sustainable and affordable journey.

If you need help navigating the mortgage process or finding the best rates for your needs, feel free to reach out to me, Diane Walker. I'm here to guide you through the process and make sure you’re getting the best possible deal for your new home.