A real estate sign is posted outside a home in Pointe-Claire, a city in Montreal's West Island, on May 7.Christinne Muschi/The Canadian Press
After two years of historically high interest rates, the cost of borrowing is finally trending lower in Canada. Our central bank has cut rates and, with more reductions expected, bond yields are falling back to year-ago levels, leading lenders to chop their fixed-rate offerings.
But it can be tough for mortgage shoppers to navigate a rapidly evolving marketplace. Here are a few common stumbles to avoid when seeking out the best mortgage.
Not getting a preapproval
When kicking off their home search, many buyers think the first step is to check out open houses and call a real estate agent or two. But entering the market without a mortgage preapproval is going in blind.
This is a commitment from a mortgage provider that lays out the maximum amount you can borrow, at a particular rate. With this information in hand, home buyers can narrow their search, knowing exactly how much they can afford, and what they’ll be committing to paying each month on their mortgage.
A preapproval also secures a specific rate for between 90 to 120 days; this protects you in case interest rates rise during this time frame. If they drop, your lender will simply qualify you at the lower rate. In competitive real estate markets, most sellers won’t even entertain an offer from a buyer without a preapproval in hand – that is, an offer conditional on getting financing approval. Preapproval is a crucial first step that sets buyers up for success.
Taking the first rate offered by your bank
Would you buy a new appliance or tires for your car without shopping around for the best features and price? Your mortgage should be no different.
Canada’s banking landscape is unique in its homogeneity – our Big Six banks have immense brand recognition and trust among borrowers, but they won’t always offer you the best deal. It’s in the best interest (no pun intended) for mortgage shoppers to compare mortgage rates offered from all types of lenders, including credit unions and smaller specialty lenders, to find their lowest possible rate.
Here’s where using a mortgage broker comes in handy, as they can conduct this search on your behalf, for free. Keep in mind that all brokers are not connected to all banks. Those who are keen to do their own research can use online resources, such as rate comparison websites, to weigh their options. Or, they can even take a full do-it-yourself approach and use an online platform to find their rate, upload their documents, and secure their financing -- all without a mortgage pro middleman.
And if you still want to go with the bank you have other accounts with, being armed with the knowledge of what you could get elsewhere is important leverage – they may match it.
Immediately signing your renewal letter
If you’re coming up for a mortgage renewal – as nearly half of Canadian mortgage holders will be over the next two years – it may seem tempting to just stick with your existing lender and be done with it. Banks know borrowers want simplicity here, and they make the process as easy as possible by sending you a renewal letter at least 21 days before your term is up. Sign on the dotted line and you’ll be all set – except it might do you a great disservice.
The first reason is that lenders are less likely to offer competitive renewal rates to existing customers – they save those for new clients. That’s why it’s a great idea to give your broker a call early – you can start the renewal process up to 120 days before your term expires – to compare your options. Think of your mortgage renewal like clearing an Etch-A-Sketch; you can start from scratch with a new rate, term, or even pay it off entirely without incurring a penalty. It’s a good time to re-examine what mortgage product best suits your needs.
One important caveat is that borrowers without mortgage insurance – those who’ve paid more than 20 per cent down – will be required to qualify with a new stress test if they switch to a new lender at renewal. (Those with insured mortgages are not, assuming their original mortgage size and amortization remains the same.) Don’t let this scare you off – the savings from a lower mortgage rate will save you literally thousands of dollars over the course of your term.
Locking into a longer fixed rate
Fixed mortgage rates are by far the preferred mortgage choice among Canadians – accounting for 69 per cent of all mortgages this year. Borrowers like knowing their payments won’t change, even during periods of market volatility.
But locking in can be a hindrance when interest rates are trending lower, which they currently are. And since the Bank of Canada is expected to cut rates further in the coming months, and bond yields pull fixed rate options lower, no one wants to stay stuck at an elevated rate for the long-term.
This is why shorter fixed terms have boomed in popularity over the past year, especially among renewing borrowers. According to Canada Mortgage and Housing Corp.’s 2024 Mortgage Consumer Survey, the number of renewers who picked a three-year term rose to 24 per cent from just 18 per cent in 2023. Meanwhile, those who chose a five-year term dropped to 43 per cent, from 53 per cent the year prior.
Going with an even shorter term – such as a two-year fixed – provides even greater flexibility to make a change to your mortgage sooner, preferably when the Bank of Canada hits the bottom of its hiking cycle.
Penelope Graham is the director of content at Ratehub.ca.
