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5 Mar

Rock Bottom Rate Confusion


Posted by: Griffin Gillis

I was going to title this blog “insured, insurable and uninsured mortgages” but the title “blah, blah and blah mortgages” may have been equally enticing to a reader. My interest in mortgages isn’t always met with the same enthusiasm; however, whether mortgages excite you or not these blogs can help you gain an understanding of the process and make you feel like you aren’t overwhelmed when you begin the process of getting financing for your dream house.

I often hear people quote rates that are the absolute rock bottom market rates. This often gives people an unrealistic view on what rates they can actually qualify for. When you google “mortgage rates” and look at the first set of advertised rates, that doesn’t necessarily mean that you will qualify for the lowest rates. The rate you can actually qualify for depends on a number of things.

  1. Fixed vs Variable: Fixed mortgages are set payments with set interest rates; if rates go up or down the client pays the same monthly payments until the term is over. Variable mortgages are fluctuating payments that follows the market trend (better if you know rates are going down). Variable rates are currently advertised as lower with some exceptions depending on the lender and term. Make sure to know the difference before getting excited for a 1.34% variable rate when you actually want a fixed rate.
  2. Term: This is the amount of time the client is committed to specific parameters (lender, rates and other conditions). Term is not to be confused with amortization which is the amount of time it takes to fully pay off the loan. The amount of years within the term determines what kind of rates are paid. Lenders normally offer 1,2,3,4,5,7 and 10 year terms but other types of terms can be found depending on the lender. Traditionally, the lowest rates are a 5 year term which also makes it the most popular. Be sure to know what type of term you’re interested in before expecting a certain rate.
  3. Limited: Certain mortgage rates have limits to them or are only available for a limited time. One example is Bona Fida sale clauses: this clause within a mortgage blocks you from refinancing with another lender when your term is over and either has extremely high breakage fees or simply wont allow you get out of your mortgage. Quick close mortgages are another example: these mortgages are only available for a limited time and require the closing date to be within a specified time period. There are other clauses and programs that offer low rates just like the two listed above that home buyers should be carful about. Make sure to read or have a mortgage agent read over the commitment before you get into something that might not benefit you in the long term.

The listed items above are very simple explanations of how certain aspects of a mortgage could confuse someone with regards to rates; however, to throughly explain all of the details would require a much longer post. If you want to find out more, please reach out.  I’d love to talk with you about your plans.

If you’re not already teeming with excitement about rates and how to remain confident in a market with hundreds of mortgage programs, here’s the grand finale that determines what type of rate you can get: Insured, insurable and uninsured mortgages! Yes, the exclamation mark was necessary. It’s just that important. I find myself quoting those three words everyday to figure out what type of rate I can get for my clients. Let’s go through them!

Insured mortgages or high ratio mortgages offer the lowest rates because they are least risky to the lenders. They require the borrower to pay an insurance premium that protects the lender if the borrower were ever to default. This type of mortgage is mandatory when the down payment is under 20%. They also have a maximum 25 year amortization, raising monthly payments and lower borrowing power because the client wouldn’t be able to stretch payments over 30 years. Also, if the client requires a mortgage on a rental property, refinancing or for a property above a million dollars they would not be eligible for an insured mortgage. I often hear people quote insured rates because they’re the lowest. Even though they’re the lowest, make sure you can qualify for an insured mortgage and make sure the added premium/restrictions are viable for you.

Insurable mortgages normally offer rates higher than insured mortgages but lower or similar to uninsured mortgages. They also require mortgage insurance and are less risky to the lender. However, the insurance premium is paid by the lender and not the borrower to protect themselves. Insurable mortgages follow all of the same guidelines as insured because they’re not available to clients wishing to purchase a rental property, get a refinance or purchase a property over a million dollars. The only difference is that down payment has to be over 20% and no insurance premium is paid by borrower.

Insured and insurable mortgages are restricted to clients purchasing a property over a million dollars; however, if a property was purchased for under a million dollars and that property appreciated in value over the first term of said mortgage the client would be allowed to stay in their insured or insurable mortgage until the end of the term.

Uninsured mortgages offer the highest rates because they aren’t insured and as a result riskier to lenders. This mortgage allows for everything that insured and insurable mortgages allow and have less restrictions. Rental purchases, refinances and properties above a million dollars are all uninsured deals. They also allow amortization up to 30 years, giving clients more borrowing power and a 20% down payment or more is required.

In summary, mortgage rates depend on a multitude of factors and it’s more important to fully understand your mortgage than disregarding a mortgage product simply because it’s rate is not rock bottom.