Getting trapped in a loan with unfavourable mortgage rates can mean you’ll be paying hundreds of thousands of dollars more over the lifetime of the loan. In 2023, with interest rates what they are, is there such a thing as favourable mortgage rates? Maybe not, but there are definitely things you can do to tip the scale in your favour. So, how do you get the best mortgage rates in Victoria BC in 2023? Read on for our top 5 tips.
To get the best mortgage rates, you must present as a low risk to the lender. To do this, first look at your debts to see how you can fix up or leverage this very important aspect.
Your credit score is one of the aspects a lender looks at to assess the probability that you’ll pay back the loan. A high credit rating means you have a history of repaying your loans on time, and you’ll probably do the same with your mortgage. The higher your credit score, the less perceived risk for the lender. A credit score falls anywhere between 300 and 900. A good credit score is between 660 and 724, very good is 725 to 759 and above that is excellent. Check your credit score and investigate any strikes against you.
Even though it may take some time, it would certainly be worth your while to improve your credit rating as much as you can before going house shopping. To get a credit rating in the first place, you need to have taken on some debt, such as the regular use of a credit card, a line of credit or taking out a car loan. In this way you establish a credit history: the longer you’ve had a credit account open and in use, the greater the potential for a high credit score, assuming you’re prompt in making your payments.
A few basic credit hygiene rules to build up or maintain your credit score are to:
The debt to income ratio (DTI) is the percentage of your gross monthly income that is used to pay off debts. This ratio gives lenders a general idea of how good you are at managing debt and if you are overextended. To lower your DTI ratio to what lenders consider to be acceptable — less than 42% — you can buy only what you can afford with cash, or make larger payments on your debt, or increase your income, or all of the above.
Ideally, have 3 to 4 months worth of mortgage payments, or better yet — living expenses, sitting in a bank account, in case you lose your job. This will show a lender that you are financially responsible.
It may seem unfair, but lenders favour borrowers who are employed by business rather than those who are self-employed or free-lancing. If you are a couple with one self-employed person and the other employed, you might get a better rate if the loan is taken out in the employed person’s name — especially if that person has been working for the same employer for at least 2 years.
In any case, compile documentation of your work history showing that you are financially stable.
The bigger the down payment, the lower the risk to the lender and consequently they will offer you a lower interest rate. The minimum in Canada is 5 to 20% depending on the value of the property.
If you can afford the monthly payments, you could choose a mortgage with a shorter amortization period of 10 to 15 years (the total lifespan of your mortgage) to pay less interest while building home equity, but this option does reduce repayment flexibility.
Even if you choose a mortgage with a longer amortization period (25-30 years), shorter mortgage terms usually offer lower interest rates. A mortgage term is your current contract at a set mortgage rate which will need to be renewed when the term is up.
As an alternative to committing to a short amortization period mortgage, you can simply use prepayment privileges — usually 15-20% — to pay down your mortgage quickly without being shackled to the high minimum monthly payments. Additionally you can also choose to take advantage of accelerated bi-weekly payments, this way you’re making the equivalent of one extra monthly payment per year.
The financial situation in Canada is volatile. The Canadian prime lending rate has risen sharply over the last year, making the decision of whether to commit to a fixed or variable mortgage rate that much more complex. At the moment (August 2023), variable rates are at a historic high — higher than fixed rates even. While most believe that variable rates have now reached their peak, they continue to be risky for today’s borrower if they also come with a fixed regular payment. With the steeply increasing prime rate, at a certain point your payment won’t cover the interest and principal repayment. This is called the trigger point. In effect, amortization stops because no principal is being repaid. You could pay that amount forever and still owe the same amount. The only option would be to increase the payment or reduce the principal to a point where the fixed payment covers both principal and interest again.
So, the question of whether to choose a fixed vs a variable mortgage rate is challenging at the best of times, but even more so during turbulent economic times. It is best to talk to a mortgage professional who is on top of the situation and has years of experience dealing with all sorts of economic landscapes.
As you’ve seen, there are a multitude of things you can do to get the best mortgage rates in Victoria BC. The top advice we can give you, however, is to talk to us. We’ll help you develop a plan so you’re in the very best position to achieve the best mortgage rates, and we’ll help you by shopping for the right products for your situation, comparing and contrasting various options, so you come out ahead.