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