How To Shop For A Mortgage In Canada, Like A Boss

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A house is the most expensive purchase you’ll ever make. But unless you’re Jeff Bezos, you probably can’t buy a house outright with cash. Like the rest of us, you’ll need to find a lender willing to finance your mortgage.

But not all mortgages, or the lenders who offer them, are created equal. It’s not a one-size-fits-all scenario. You’ll need to roll up your sleeves and do some digging in order to find the right mortgage for your needs.

The good news is that there are tons of tools and resources available to help you make an informed decision. The first step is deciding on the right kind of mortgage for your needs. Then you can get to work finding a lender who can offer the best possible mortgage rate.

Don’t know where to start? Let us help you shop for the best mortgage in Canada like a boss with these handy tips.

Understanding Qualification Requirements

The Importance Of Your Credit Score

In Canada, you need a minimum credit score of at least 600 to qualify for a mortgage. And not only that but your income, debt load and down payment will all come together to determine what your interest rate will be. You can’t demand a lower rate if your score is weak. And you shouldn’t settle for the posted rate your bank offers if you have a strong credit history.

Request a copy of your credit file from a free site like Borrowell to see where you stand. Do you have a crappy credit score? Start cleaning that up as soon as possible. Pay up past due accounts, settle any collections, pay down credit card balances and make all your payments on time. Even if you qualify for a mortgage as is, you’ll get slammed with a higher rate. Taking the time to do some credit housekeeping will literally save you thousands of dollars.

Understand How Your Debt To Income Ratio Works

Your credit score isn’t the only thing banks look at. The next most important thing to consider is your debt service ratio. This is a formula that measures your total gross income against homeownership costs and all your other debt payment obligations. Simply put, are you making enough money to afford a mortgage payment and everything that goes into owning a home, along with all your other debt obligations and costs of living?

If you already have a mortgage but have accumulated more debt since, you could be looking at a higher rate if your bank considers you a riskier borrower now. Focus on paying down as much debt as possible before making a purchase or renewing your mortgage term. The less debt you have, the more bargaining power you have and the lower your rate will be.

Are You Capable Of Handling A Mortgage?

In addition to your income and debt load, banks will make an assessment of your overall financial profile. They will look closely at your employment history, living expenses, how much you are asking to borrow, the size of your down payment, and the amortization period of the mortgage. If you’re carrying a lot of debt, are new at your job, or have a minimal down payment you could be considered a higher risk which means a higher rate.

Or maybe you’ve been with your employer for a donkey’s age and there’s nary a balance to be seen on your credit cards. In that case, you have considerably more bargaining power. Know whether or not the chips fall in your favour so you can start the negotiation process off on the right foot.

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Do You Have Enough Of A Down Payment?

In Canada, the minimum down payment on a house is only 5%. But of course, all good things come with a catch. If you cannot afford the 20% down payment required for a traditional mortgage, the Canadian Mortgage and Housing Corporation (CMHC) will allow you to finance a mortgage up to 95% of the purchase price.

Since buyers with down payments less than 20% are considered more risky, CMHC insures your lender against loss in the event you default. Your lender pays premiums for this insurance, just like any other type of insurance, but they pass that cost on to you. Sometimes you can pay for it in a lump sum. But most of the time it’s added to your mortgage balance. This means your monthly payments will be higher, you’ll pay more interest and in some cases may extend the amortization period of your loan in order to keep those payments affordable.

With a traditional mortgage, no such insurance premiums are required. Whenever possible, opt for a traditional mortgage to avoid the additional costs associated with CMHC. Depending on the housing market you’re in, you’re probably better off renting if you can’t save at least a 20% down payment.

Understanding How Rates And Mortgages Work

Open Vs. Closed Mortgages

There are actually several types of mortgages, but if you’re a new or typical buyer then you really only need to know the difference between Open or Closed Mortgages. Depending on your financial situation, goals and nature of your employment you’ll need to determine how much flexibility you need.

And Open Mortgage does not lock you into a prescribed term. If you plan to sell the property within the next 5 years or so, want to pay it off quickly, or perhaps your job moves you around a lot, then an open mortgage would make sense for you. It comes with a higher interest rate but it allows you the freedom to sell it, pay it down aggressively or pay it off completely without incurring any prepayment penalties.

Closed Mortgages are the foundation of the mortgage industry and are by far the most common type of mortgage. A closed mortgage locks you into specific conditions for a prescribed amount of time, typically 2 to 5 years. That means your rate and monthly payment will be locked in and remain the same over the term you’ve chosen.

Even though you’ll get a considerably lower interest rate, you’ll be restricted from selling, paying down or paying off your mortgage before the end of that term. Doing so comes with hefty penalties in the thousands of dollars for breaking your term early. You may be allowed certain prepayment privileges to help you pay your mortgage down faster, but they differ widely among lenders. Make sure you fully understand how much you can pay and when to avoid incurring extra costs.

A Closed Mortgage is the gold standard for typical buyers who plan to remain in their home long term and don’t plan on paying off their mortgage anytime soon. Having said that, when your mortgage term comes up for renewal, you have the opportunity to negotiate a better interest rate and other more favourable terms.

Fixed Vs. Variable Interest Rates

As if applying for a mortgage and house hunting weren’t stressful enough, now we tell you there are different types of interest too. Good grief! But if you’re going to find the best possible mortgage you need to understand how the different types of rates work and how they affect you.

Fixed Interest rates are the most popular and are locked into a closed mortgage term. They are typically higher than the other types of mortgage interest rates. But they don’t fluctuate which means your payment will stay the same throughout the term. This will give you peace of mind knowing your payment won’t change month to month.

Variable Interest Rates do just as the name suggests, they vary up and down over the term. While they are generally lower, they’ll make your payment amount fluctuate from month to month. Alternatively, you can opt-in for a fixed payment. But as the rates change so will the portion of your payment that goes to interest and principal. Sometimes more of your payment will go to interest, and other times more of it will go to principal.

Hybrid Interest Rates are a happy middle ground between fixed and variable rates. That means part of your mortgage will have a fixed rate and part of it will have a variable rate. That way you can reap the benefits of falling mortgage interest rates while protecting your payment from increasing too much should they go up.

Shopping For The Best Mortgage And Interest Rate

Online Comparison Tools

Hands down the quickest and easiest way to shop rates and mortgages is to use an online comparison tool like Hardbacon. Just enter in key information like whether you’re making a first purchase or renewing an existing mortgage, the total amount you think you need to borrow, how long you think you’ll be in the house before selling, etc. You’ll get a list of all the best lenders for your needs and you can filter the results by rate, term, bank, etc.

Comparison sites are a great place to start to get an idea of the options out there. But definitely do not put all your eggs in this basket. Super competitive rates can come with some pretty strict conditions to meet. So take note of several attractive offers then start contacting those lenders for more information.  Rates change daily so make sure you print or screenshot your quote to help secure the best possible interest rate.

Mortgage Brokers

Not all comparison sites have access to every mortgage lender and their rates. Not only that but sketchy credit files or complicated income statements can muddy the water too. That’s when a mortgage broker comes in handy and they will walk you through the entire process. Their primary job is to find you the best possible mortgage and rate for your financial needs. They’ll work with their network of lending partners to find the best fit for you no matter your situation. They’ll likely find flexible terms or private lenders you didn’t even know existed. Keep in mind that brokers do not work with all available lenders in the market. So use brokers in addition to other tools like online comparison sites.

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Negotiate With Your Bank

You may be tempted to default to your home bank because you’re familiar with them and you already have a financial relationship. But unless you’ve shopped around, you may not be getting the best rate. Don’t be afraid to challenge your own bank or mortgage holder about their interest rates. If you have a strong credit history and a good relationship with them, they may be willing to lower the rate to keep your business. Even if they can’t lower the rate, they may be able to offer alternative perks or incentives like covering your legal fees or appraisal. Make sure you know what other options are out there and what another lender is willing to give so you have leverage when negotiating.

Meet With Other Lenders

Of course, it’s incredibly hard to negotiate anything without a competing offer. Shopping around doesn’t just give you an idea of what’s happening in the market, you can use an offer from another lender as a bargaining chip. Traditional banks aren’t the only ones financing mortgages either. Other important players include Credit Unions, Caisse Populaires, and virtual banks. Virtual banks are a particularly attractive option since their low overhead costs allow them to offer much lower mortgage interest rates than traditional brick and mortar institutions. They can also process your application in a fraction of the time. That means you can move fast to scoop that perfect home at the perfect price.

Shop Like A Boss

With some basic understanding of how mortgages work, you’ll be better equipped to negotiate your way to the best mortgage rate. Shopping for a mortgage in the 21st century has never been easier. With so many online tools at your fingertips, sticking with your bank and hoping for the best is a relic of the past. Now you have instant access to almost every lender and their best offers. Welcome to the golden age of mortgage shopping.

Heidi Unrau is a senior finance journalist at Hardbacon. She studied Economics at the University of Winnipeg, where she fell in love with all-things-finance. At 25, she kicked-off her financial career in retail banking as a teller. She quickly progressed to become a Credit Analyst and then Private Lender. This hands-on industry experience uniquely positions her to provide expert insight on loans, credit scores, credit cards, debt, and banking services. She has been featured in publications such as WealthRocket, Scary Mommy, Credello, and Plooto. When she's not chasing after her two little boys, you'll find her hiding in the car listening to the Freakonomics podcast, or binge-watching financial crime documentaries with a bowl of ice cream. Fun Fact: Heidi has lived in five different provinces across Canada and her blood type is coffee.