The best rate is...

“What’s your best rate? I saw on-line that I can get 2.89 per cent for five years.”

Many times this is the first question clients open with. In the past, this was a relatively simple question to answer.

Changes to mortgage rules introduced in October 2016 have made this question far more challenging.

Most news stories and conversations have focused on qualification guidelines, and how the new rules affect clients’ borrowing power.  

One aspect of the changes that has been overlooked is the new definition of which mortgages are considered insurable.

Insurable mortgages are those eligible for default insurance. Default insurance, which is most commonly referred to as CMHC insurance (provided in Canada by CMHC, Genworth, and Canada Guaranty), protects the lender in case the mortgage goes in to foreclosure.

With the changes introduced in October 2016, the definition of which mortgages are insurable changed.

At this time, rental properties are no longer considered insurable. Refinances are no longer insurable.

How does this tie in to the best-rate question?

Prior to October 2016, I had two rate sheets to reference: 

• one sheet for high-ratio (insured with less than 20 per cent down payment) mortgages
• a second sheet for conventional mortgages (20 per cent or more down payment).

Today, I have three categories of rates. I have six rate sheets of lenders and rate categories to go through to find a suitable fit, depending on the client’s situation.

Lenders offer different rates for insured mortgages, insurable mortgages, and for rentals and refinances.

To add to this complexity, many lenders are offering a tiered rate structure within the insurable and rental/refinance rate brackets, depending on how much equity the client will have in the property.

Before I even consider quoting a rate, I need to ask my client a series of questions. This can be frustrating for clients who haven’t been through a mortgage application in the last few years.

Because rental properties and refinances are no longer insurable, there is greater risk to the lenders in the event that things go sideways with the mortgage. In most cases, these rates are now priced slightly higher to help mitigate that risk.

Most challenging to explain to clients is that when they are putting 20 per cent or more down, their rates are slightly higher than those offered to clients who have to pay mandatory default insurance.

It seems counter-intuitive to think that people putting more money down have to pay a higher interest rate than clients making a minimum down payment.

Making it even more complex, some lenders no longer offer certain mortgage products. For instance, trying to find a competitive rate for clients looking to refinance a rental property last week proved to be very challenging.

Their current mortgage holder no longer offers mortgages on rental properties, which means they will have to pay a penalty to move to a new lender that does offer refinances on rentals.

Finding a low rate is obviously important. With the changing mortgage environment it is more important than ever to understand the fine print of different mortgage products. 

When you are looking for a new mortgage, as important as the rate question are the following:

• What are the prepayment privileges?
• Is this mortgage portable?
• Is this mortgage assumable?
• How does this lender calculate early payout penalties?

As we move forward and adjust to the new mortgage guidelines, lenders are fine-tuning their products to remain competitive and offer clients a wide range of options.

Your mortgage professional will be able to offer you advice and guidance as to the best fit for your situation.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.