"Daddy, Where Do Rates Come From?"

"What is the best rate you can give me right now?” “My friend received a better rate than me, why is that?” “Why is the rate better if I put a lesser down payment?” These are some of the questions I receive multiple times a week when it comes to rate discussions and structuring of files. My name is Paul Stevenson and I am a Mortgage Agent with over 15+ years of experience advising clients on finances and mortgages.??

I was explaining the ins and outs of the rate puzzle to a realtor partner this past week and thought this would be a good opportunity for me to explain to everyone the differences between lenders, their rates and everything in between.?

When you choose to work with me, a Mortgage Agent, I am considering up to 1000+ rates to choose from as a solution. As a Mortgage Agent, I have access to over 30 different mortgage lenders in Canada including major banks, mortgage focused banks, trust companies, credit unions, alternative lenders and even private lenders. Each one of these lenders sends me a literal matrix of rates to provide clients depending on a multitude of factors which I will explain in detail. The main buckets that rates fall into are: insured, uninsured and insurable. I have given you the key points to each below as a reference:

Things to know about an insured mortgage:

• Insured mortgages are available for purchases of owner-occupied properties under $1M with an amortization of 25 or less years.
• With an insured mortgage, the minimum down payment is 5% and cannot be over 19.99%.?
• The premium is always paid for by the client and you can find a list of the insurance premiums HERE.?

Things to know about an insurable mortgage:

• The minimum down payment for an insurable mortgage is 20%.?
• These are available for purchases under $1M and mortgage renewal transfers with 25 years or less in amortization.
• Insurable mortgages are “bulk” insured by the lender as opposed to insured individually per file.? (bulk insured is a collection of different mortgages insured together)?
• This type of mortgage protects the lender against default, but not to the degree of an insured mortgage.
• the lender pays the insurance premium, not the applicant

Things to know about an uninsurable mortgage:

• The minimum down payment for an uninsured mortgage is 20%.
• Up to a 30 year amortization (in some cases 35).
• No insurance on uninsurable and rates will be slightly higher on a 30 year amortization.
• Some lenders will have more flexibility with regards to credit and overall debt to income ratios with this type of mortgage.

Lenders have buckets for each one of these above mentioned types of mortgages. This means that the same lender can offer a different rate depending on whether you put 10% as a down payment on your new owner occupied purchase as opposed to a 20% down payment. When a borrower puts less than a 20% down payment and the mortgage is insured, the lender takes on little to no risk as the mortgage is insured against default and if the borrower defaults, the lender gets ALL of their money back. Lenders therefore will provide preferred rates to those applicants putting less than a 20% down payment as they see it as a less riskier loan than a client who puts 20% down and is uninsured. In this case, if a client puts 20% down and then defaults, the lender is required to take back the home and then turn around and sell it in the open market which can take months and add costs to the lender's bottom line. Due to this perceived risk, lenders offer higher rates for those mortgages which are uninsured.?

I have included this example below for a better visual:

Example #1?

Jane is buying her first home and is using her savings for her down payment in the amount of $50,000. The home she is purchasing cost $500,000 thus equaling a 10% down payment. Due to this mortgage being insured, Jane is receiving a variable rate mortgage of Prime -1.00% (this is just an example, not an official rate quote).?

Example #2?

Jane is buying her first home and is using her savings for her down payment in the amount of $100,000. The home she is purchasing cost $500,000 thus equaling a 20% down payment. Due to this mortgage being uninsured, Jane is receiving a variable rate mortgage of Prime -0.60% (this is just an example, not an official rate quote).

Now you are probably asking yourself: “Is it better to put a smaller down payment and take advantage of the lowered interest rate?”. The answer to that question would be: “no”. I have done countless calculations over the years for this exact scenario, and due to the cost of the insurance premium, the borrower will always be better off by putting a larger down payment. In the scenario above, Jane would have had an insurance premium of $13,950 added to the total mortgage amount and would have interest applied to it as well throughout the term of the mortgage.?

It is also important to keep in mind that some unique property types and file types also have premiums added to them for risk mitigation from the lenders. For example, a rental property will typically have a .25% rate premium added to it compared to an owner occupied home. A couple of other examples would be someone who may be buying a property within a Holding Company or has bruised credit, these are all factors lenders use, and I as a Mortgage Agent use, to select the best lender and the best rate for my clients.?

At the end of the day, my job as a Mortgage Agent is to fully understand my clients unique profile and circumstances, their goals and their long term plans so I can find the most suitable lender possible and at the lowest rate available.?

If you have questions about what rate you might qualify for, have an upcoming mortgage renewal, are considering refinancing or buying a new home, connect with me at www.paulstevenson.ca and schedule an appointment to discuss further. Thanks as always for your support and be sure to check out my podcast, “The Ottawa Real Estate Podcast” on YouTube or any streaming platform.?

-Paul S