Not all interest rates are created equally. This is a big topic to breach; to be specific, not all “A” rates are created equally. For the purpose of this article I will be focusing on Prime lending. This excludes alternative lending and private lending which have their own criteria and various ranges.
What is “A Lending” then? These are the banks, credit unions and non bank (but federally regulated) lending institutions. “A” Lending refers more to the client than the lender. Good credit scores, reliable and easy to prove income and low/serviceable household debt make up “A” clientele.
So many times I get calls from clients that are purchasing a new home about the rate they found online and have to explain why their purchase does not qualify for that rate. Obviously, if you are a lender advertising rates online and want to attract attention, you will advertise the lowest rate. A lot of the time these rates are for terrible, inflexible mortgages (I’ll get into this in another article) but most often the advertised rates are for a high ratio mortgage.
There are 3 main tiers of mortgage interest rates.
- High Ratio
- Conventional Insurable
You fall into a High Ratio mortgage when you have a down payment of less than 20%. The minimum down payment required for a purchase in Canada is 5%. So a high ratio mortgage is an insured mortgage when your down payment ranges from 5%-19.99% of the purchase price of the property. The mortgage insurance protects the lender in the case that you default on the mortgage. The lender passes the insurance payments to you (lucky you!). The insurance ranges from 2%-4% of the mortgage balance depending on the size of your down payment.
Because you are paying the default insurance, to protect the lender from you defaulting on the mortgage, the lender is not liable for the mortgage balance if you fail to make your payments. So, essentially, the lender is not at risk. As a result, the lender can offer you the best rate possible.
The reward for you is the lowest rate offering from the given lender.
The second best rates available are for Conventional Insurable mortgages. If your down payment is 20% of the purchase price or greater you no longer have to pay the default insurance! This is great news for you, but not as great for your lender. In this case, the lender will pay for the insurance. Since you have considerable equity in your property (at least 20%) there is less risk for you to default so the cost of the insurance is much less. The lender will ‘bulk insure’ the portfolio of conventional mortgages. But since the lender is paying on your behalf, they will recoup it by charging you a slightly higher interest rate. The last of the “A Lender” rate tiers is the Uninsurable mortgage. This includes any property valued over $1,000,000 at the time of purchase, refinances, amortizations over 25 years and non owner-occupied properties (rentals). The lender assumes full liability for the loan, in the case you default, so your interest rate will be highest of available rates.
Here is an example of the differences in rates from one of the big Canadian banks.
5 year fixed rate mortgage
High Ratio: 2.24%
Dominion Lending Centres Edge Financial
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