Two people can walk into the same lender on the same morning and be quoted different mortgage rates. Neither of them is being treated unfairly. Mortgage pricing runs on a set of rules about risk, and where you sit against those rules decides your rate before any conversation about it begins.
Understanding what moves a rate is more useful than knowing how to haggle over one, because most of the discount is decided by how the file is built and where it is placed.
Posted Rates and What People Pay
A posted rate is a lender’s published rate. It is rarely the rate anyone gets, and its main function now is as the reference point for certain penalty calculations rather than as a price.
The rate you are offered is a discounted rate, and how far it sits below posted depends on your file. That gap is the part to pay attention to, and it is much larger than any amount a borrower is likely to negotiate at the counter.
The Six Things That Set Your Rate
- Whether the mortgage is insured. This is the largest single factor and it works in the direction most people find surprising. A mortgage with less than 20 percent down carries default insurance, the lender’s risk is covered, and the rate is typically lower than on an uninsured mortgage. Putting 20 percent down buys you equity, not a better rate.
- Where you sit in the loan-to-value bands. Lenders price in tiers rather than on a sliding scale, so being just over a threshold and just under it are meaningfully different prices for a small difference in down payment.
- Term length. Rates differ by term, and the lowest-rate term on any given day is a function of where the bond market sits rather than a rule. The cheapest term is not automatically the right one.
- How you intend to occupy the property. An owner-occupied home prices lowest. A rental property carries a premium, typically in the range of 0.15 to 0.50 percent above an owner-occupied rate. A second home or recreational property sits somewhere between depending on the lender.
- Amortization. A 30-year amortization on an uninsured mortgage usually prices above a 25-year one. The longer amortization lowers the payment and raises both the rate and the total interest.
- Credit strength and how provable the income is. A strong credit profile with straightforward employment opens the full lender panel. A file with variable income or repaired credit narrows it, and a narrower field is a higher price.
The Two Discounts That Are Not About Rate
A rate is a number and a mortgage is a contract. Two features carry significant amounts of money and are frequently traded away for a small rate improvement without the borrower realising a trade happened.
The first is the penalty calculation method. Lenders calculate the interest rate differential differently, and some methods produce penalties several times larger than others on the same mortgage broken at the same moment. A mortgage that will probably be broken early is a mortgage where the calculation method matters more than a small rate difference.
The second is prepayment privileges: how much you may pay down each year without penalty, and whether you may increase your payment. On a mortgage you intend to pay off aggressively, those privileges are worth more than a modest rate reduction.
How a Rate Hold Works
When you are pre-approved, the rate you are quoted is usually held for a defined period while you shop. If rates fall during that window, you take the lower rate. If they rise, you keep the one you were given.
That makes the hold a one-sided option in your favour, and it is a reason to get pre-approved before you start viewing rather than after you have an accepted offer.
Where the Discount Comes From
The largest rate reductions do not come from asking. They come from the file being placed with the lender whose pricing is sharpest for that particular set of circumstances on that particular week, and that changes.
Michelle submits one application and prices it across the lenders on her panel, which includes banks that lend through broker channels, credit unions, monoline lenders and alternative lenders. Because those lenders are competing for the same file at the same moment, the comparison happens without you making a case to anyone.
Structure is the second part of it. Adjusting a down payment by a small amount to clear a pricing tier, choosing the term the lender is pricing aggressively that week, or presenting variable income in the form a particular lender’s guidelines are written for all move the rate, and none of them is visible from outside the process.
What a Small Rate Difference Is Worth
The numbers cut both ways, so here is the scale in both directions.
On a $600,000 mortgage, a difference of 0.10 to 0.30 percent works out to roughly $3,000 to $9,000 in interest over a five-year term. That is a meaningful sum and worth pursuing.
It is also less than a badly calculated prepayment penalty on a mortgage broken in year three, and less than the cost of an approval that does not happen. Rate is the right thing to optimise once the file is placed with a lender that suits it. It is the wrong thing to optimise first.
Mortgage Rate FAQs
Why is my rate higher when I have a bigger down payment?
Because a mortgage under 20 percent down is insured and the lender’s risk is covered, while an uninsured mortgage is not. The insured rate is usually lower. You are paying for the insurance through the premium rather than through the rate.
Are broker rates better than bank rates?
Rates available through broker channels are often better than a lender’s posted branch rates, because the lender is competing for the file rather than serving a customer already in front of it. The larger benefit is that several lenders are competing at once.
Should I always take the lowest rate on offer?
Not without reading what comes with it. The lowest rates are sometimes attached to restrictive products with limited prepayment privileges, a penalty method that is expensive to break, or no portability. Whether that trade is sensible depends on how long you expect to hold the mortgage.
Does a variable rate cost less than a fixed rate?
Sometimes, and it varies with market conditions rather than following a rule. A variable rate exposes you to changes during the term; a fixed rate prices that certainty in. Which suits you depends on your tolerance for payment changes and how much room your budget has.
Can I get a better rate at renewal?
Renewal is one of the better opportunities available to you, and it is the one most often missed. A lender’s renewal offer is not the sharpest rate it has, and there is no requirement to accept it. Starting the comparison a few months before the maturity date leaves room to move.
To find out which lender is pricing your circumstances best right now, contact Michelle Scheibel at My Kelowna Mortgage. She is licensed by the BC Financial Services Authority and prices every file across banks, credit unions, monoline and alternative lenders from a single application.