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Understanding Mortgage Rates

February 18, 2025 | Posted by: Christopher Chanakos

Understanding Mortgage Rates: What You Need to Know

When shopping for a mortgage, one of the most common questions we ask ourselves is, 'Why don’t I get the advertised low rates?' The reality is that the rates you see advertised are often the lowest possible rates, which lenders use to attract attention. However, these rates may not always be the rates you're eligible for. Understanding the different types of mortgage rates, and the factors that influence them, can help you better navigate the mortgage landscape.

Mortgage Rates Explained

Mortgage rates can fluctuate quickly, and several factors can impact the rate you’re offered. These include:

  • Your credit score: Lenders offer better rates to borrowers with higher credit scores because they represent a lower risk.
  • Amortization period: Shorter amortization periods often come with lower rates, as the lender’s risk is reduced.
  • Loan-to-value ratio (LTV): The higher your down payment, the lower the lender’s risk, which can result in a more favorable rate.
  • Term length: Longer-term mortgages may come with higher rates.
  • Policy exceptions and promotional rates: Lenders may offer special rates during promotions, but these can vary by the time you apply.

To make it easier to understand how rates work, let's break down the different types of mortgages and their associated rates.

1. Insured Mortgage

An insured mortgage is typically the most straightforward and comes with the lowest possible rate. However, there are specific conditions that apply:

  • Down payment: The borrower puts down less than 20% of the home’s purchase price.
  • Property value: The property value must be under $1,500,000.
  • Property type: This applies to primary residences (not rental properties or refinances).
  • Mortgage insurance: The mortgage is insured by either CMHC (Canada Mortgage and Housing Corporation) or Genworth, which protects the lender in case of default. The borrower pays for the insurance premium, which is added to the mortgage.

Because the mortgage is insured, the risk is largely transferred from the lender to the insurer (CMHC or Genworth), and this lower risk is reflected in the interest rate.

Current Rate: 5.04% (For illustration purposes only)

2. Insurable Mortgage

An insurable mortgage also offers relatively low rates but requires a larger down payment and does not include mortgage insurance. Here’s how it works:

  • Down payment: The borrower must put down at least 20%.
  • Property value: The property value must be under $1,500,000.
  • Property type: This is for primary residences (not rental properties or refinances).
  • Insurance: CMHC or Genworth approves the mortgage but does not insure it. Since the lender still carries some risk, the borrower may see a slightly higher rate depending on the loan-to-value (LTV) ratio.

Rates vary by down payment:

  • 20% to 34% down payment (LTV 66% to 80%): This is considered a riskier mortgage for lenders, as they are financing 66%-80% of the property value. As a result, the borrower will pay a slightly higher rate.

    Current Rate: 5.24% (For illustration purposes only)

  • 35% or more down payment (LTV 65% or less): With a larger down payment, the risk to the lender is lower, and the rate offered is typically the same as an insured mortgage.

    Current Rate: 5.04%

3. Uninsurable Mortgages

Uninsurable mortgages are the riskiest for lenders and therefore come with the highest interest rates. These mortgages are typically for:

  • Properties over $1,500,000
  • Rental properties
  • Refinances
  • Mortgages amortized longer than 25 years (apart from the exception on new insured guidelines)

Since the lender carries all of the risk, the rate for uninsurable mortgages is generally higher.

Current Rate: 5.49% (For illustration purposes only)

Why Your Rate Might Be Different

As you can see, mortgage rates vary depending on several factors, including the type of mortgage you’re applying for, the amount you put down, and the property you're buying. Promotional rates can also come into play, and while these rates may look appealing, it’s essential to talk to your mortgage broker to determine the most appropriate mortgage option for your situation.

The Importance of a Mortgage Broker

Working with a mortgage broker can help you navigate the various options and secure the best possible rate. They have access to a wide range of lenders and mortgage products, and can offer advice based on your specific financial situation, helping you avoid confusion and ensure you're getting the right deal.

Understanding the nuances of mortgage rates can give you a better grasp of the costs associated with homeownership. By carefully considering the type of mortgage and being aware of the factors that influence your rate, you can make informed decisions that will save you money in the long run.

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