Mortgage Articles

Interest Rates on First & Second Mortgages

Changes in interest rates can directly impact the amount you pay monthly for your mortgage. As seen many times in the past, the Canadian prime rate can quickly change three or four percent in a short time. The following is some general information about the interest rate that you can expect to receive on first and second mortgages in Canada.

Getting the Best Interest Rates on First Mortgages

To get the best rate on a first mortgage, most mortgage experts advise that you put down at least a five percent down payment. This classifies your mortgage as a high-ratio mortgage, which means the lender is protected from default by either the Canada Mortgage Housing Corporation (CMHC), or a private, government-approved insurer.

Note: This insurance does not absolve the borrower from a claim. It only covers the lender in the event of default. Your mortgage broker can further explain this topic.

Canadian Mortgages: Determining Your Best Possible Interest Rate

Look at the Prime Rate: Prime rate is very important to both lenders and borrowers. When a lender looks at prime rate, they can determine the rate at which they can lend their money to consumers. When a consumer or borrower looks at prime rate, they are looking at how this will affect their borrowing power and ultimately their monthly mortgage or loan payments. Prime rate can fluctuate with the fixed rates or it can follow a completely different trend. Watching fixed rates closely doesn't necessarily give a consumer any indication about the direction in which the prime rate will move. Prime rate mortgages are widely available and borrowers have lots of options. Many loan products are based on the prime lending rate. Mortgages, consumer loans, car loans, lines of credit and credit cards may base their lending rate on the prime rate plus or minus a discount or bonus. It is a key factor in how the Canadian economy operates and how the lenders deal with each other and the public.

Look at your credit rating: The higher your credit score or rating is, the better the mortgage rate a lender will offer you. If you know you are getting a mortgage in the next three to six months, it might be wise to check your credit score. Clearing up loans and credit cards may be all that is needed for you to get the best possible mortgage rate. Even just paying down your credit cards so they are 25 percent below the available limit can increase your credit rating significantly. A poor credit rating may cause a lender to add two to three percent to the interest rate they offer you so, make sure your credit is good.

Canada Mortgage: Rates on Second Mortgages

A second mortgage is common when first mortgage loans are not available or it doesn't make sense to break an existing first mortgage to replace it. A second mortgage, if used strategically, is a sound financial tool to fall back on. For example, if you want to go back to school to finish your degree or to further your career, a second mortgage can pay for it. If you plan on paying off a smaller portion of a larger loan quicker than the entire loan itself, a second mortgage may make sense. If the penalty to break an existing first mortgage is high, but money is needed, a second mortgage may be the answer.

With a second mortgage:

• A second mortgage is based on the equity in your home, so it doesn't have to interfere with a first mortgage. Second mortgages are usually paid back before first mortgages, as they are taken out for a shorter period of time.
• Second mortgages pose a higher risk for lenders, so you should expect to pay a higher interest rate than you received on your first mortgage.
• The rate depends on a number of factors including the amount of equity in the home, your credit rating, length of loan, etc.
• The interest rates can be between 10 and 20 percent, with around 12 percent being the norm.
• Most lenders will only lend on up to 85 percent of the equity in the home. For example, if you have $100,000 in equity, a lender will loan you up to $85,000, if you qualify.
• This equity cap by lenders is followed closely, to guard against the fluctuations in the real estate market, which is ever-changing.

Note: Remember, these are just basic rules of mortgage lending, rates and qualification. Consulting a qualified mortgage professional is the best way to get specific advice about your financial situation.

Alberta Equity has helped over 50,000 people find and qualify for the best mortgages in Canada for over ten years. We do all of the heavy lifting and ensure that you get the best mortgage rates and product features available. Apply online for a free, no obligation consultation or alternatively, view our products and services.