As a Kelowna resident, fire in the Okanagan is not an unfamiliar sight, however, what we experienced this year has had a direct impact on many friends, family, clients, and our community. I would be remiss if I didn’t take the opportunity to thank our firefighters, first responders, and so so many selfless members of our community who came together during a devastating event to help others.

Insurance is one of those topics that can get confusing really quickly when it comes to a mortgage. There is mortgage insurance, which protects the lender in case of a borrower defaulting, fire insurance, content insurance, term policies, and the list goes on and on. With that in mind, lets talk about fire insurance, when it’s required, and why, even if it’s optional, you should have your home protected.

When you take out a mortgage in Canada, the lender is going to want to make sure that their asset is protected, the asset being your home. While it’s technically yours, your home is what they have as collateral for lending you the money to purchase it, so lenders have an interest in making sure that it is covered by a fire insurance policy. What this means, is that when you take out a mortgage, they will make it a condition of lending you the money, that you will take out a fire insurance policy. If you are buying in a strata, the strata will have a fire policy for the building, you will still want to consult with an insurance broker around coverage for your possessions. They will verify you have the policy in place through your lawyer or notary when you close on the purchase of a home.

So how do you actually get a policy? It’s pretty simple, you talk to an insurance broker, they will discuss all your options, find the right policy that meets your needs, and ensure it is put in place, effective your closing date. While we, as mortgage brokers can tell you that you need fire insurance, we cannot advise you on any particulars of a policy, that falls outside the scope of our expertise.

So let’s assume for a second you are buying your house in cash, no mortgage (I know I know, not a lot of people are in a position to but let’s discuss anyways). You don’t have a specific requirement from a lender telling you that you need fire insurance, so why not save yourself some money and not get the policy? Well, in the event that a fire does occur, and you lose your home, you have no recourse. You essentially have lost your home and the money you paid for it. For a lot of people, their home is their single biggest asset and where the bulk of their money and net worth are tied up, to lose that would be a devastating loss. So while it sounds tempting to save the extra money, especially in our current economic time, it’s not worth the risk. As we see more and more fires every year in BC, part of the deal for living here, we know that more fires = more risk. Don’t take the chance!

After talking about the different rates, it’s important to understand that the rate you are offered, is based on different factors. So let’s dive into what those factors are!

Down Payment

There is an old myth floating around that the more money you put down the better your interest rate will be. Let’s dispel that myth right now! The best interest rates are on insured mortgages, meaning, you put down less than 20%. Rates will then move in what’s best described as an arch, getting slightly higher, then dropping again when you put more then 35% down. So needless to say, that myth just doesn’t hold up. So why does this happen? The answer really is simple, when you put less than 20% down, you pay the insurance premium that protects the lender in the event of you defaulting, when you put more then 20% down, the mortgage still gets insured but it’s the lender that is paying the premium, so they pass the cost on to you in the form of a higher interest rate.

Property

When you buy an owner occupied home, you are eligible for the best rates as noted above. When you purchase an investment property, you will pay a higher interest rate or a premium for it being a rental property. The reasoning is simply that you can insure a single unit rental property, so those insured mortgages, aren’t available. With the default insurance unavailable, the lender views it as riskier in the event that you default.

Refinance vs Purchase

When you refinance a mortgage, the mortgage is not insurable, it now becomes uninsurable, so as we mentioned above, that means that you will have to pay a higher rate then you would typically if you are just purchasing a property. So of course people want to know why on earth you’d refinance a mortgage if you will generally have a higher interest, well, in a lot of cases you may refinance if you want to access equity to pay off higher interest debt like credit cards, or maybe you want to invest and feel that you can get a higher rate of return on your money then you’re paying in servicing the debt, there are numerous reasons that the higher rates of a refinance make sense.

Hopefully this blog post has left you with a bit better understanding of what all goes into determining an interest rate. It’s not always as straight forward as it may appear. If you still have questions, don’t hesitate to reach out anytime either by email at brent@battenmortgages.ca or by phone at 250-300-6379.

Brent

Understanding Mortgage Rates

While not the only factor to look at when choosing a mortgage, interest rates continue to be one of the more prominent decision criteria with any mortgage product. Understanding how mortgage rates are determined and the differences between your typical fixed-rate and variable-rate options can help you make the best decision to suit your needs.

HOW RATES ARE DETERMINED

The  chartered  banks  set  the  prime-lending  rate  (the  rate  they  offer  their best customers). They base their decisions on the Bank of Canada’s overnight rate, because that’s the rate that influences their own borrowing. Approximately  eight  times  per  year,  the  Bank  of  Canada  makes  rate announcements that could affect your mortgage as variable  mortgage  rates  and  lines  of  credit  move  in  conjunction with the prime-lending rate. When it comes to fixed-rate mortgages, banks  use  Government  of  Canada  bonds. In the bond market, interest rates can fluctuate more often and can provide clues on where fixed mortgage rates will go next.

To put it simply: a variable-rate is based off of the current Prime Rate, and can fluctuate depending on the markets. A fixed-rate is typically tied to the world economy where the variable rate is linked to the Canadian economy. When the economy is stable, variable rates will remain low to stimulate buying.

FIXED-RATE VS. VARIABLE-RATE

Fixed-Rate Mortgage

First-time homebuyers and experienced homebuyers typically love the stability of a fixed rate when just entering the mortgage space.

The pros of this type of mortgage are that your payments don’t change throughout the life of the term. However, should the Prime Rate drop, you won’t be able to take advantage of potential interest savings.

Variable-Rate Mortgage

As mentioned, variable-rate mortgages are based on the Prime Rate in Canada. This means that the amount of interest you pay on your mortgage could go up or down, depending on the Prime. When considering a variable-rate mortgage, some individuals will set standard payments (based on the same mortgage at a fixed-rate). This means that, should Prime drop and interest rates lower, they would end up paying more to the principal as opposed to paying interest.

If the rates go up, they simply pay more interest instead of direct to the principal loan.

Other variable-rate mortgage holders will simply allow their payments to drop with Prime Rate decreases, or increase should the rate go up. Depending on your income and financial stability, this could be a great option to take advantage of market fluctuations.

Want to learn more about rates or need mortgage advice? Contact a DLC mortgage expert today!

Written by my DLC Marketing Team