The Big Banks, Interest Rates on Mortgages, Stress Tests, and The Role Of a Mortgage Broker
In 2019, the Bank of Nova Scotia was the first of the big banks to advertise its best mortgage rates online. Banks do not give you their best rate unless you ask. We have never understood this. BNS was the first to be more upfront. To date, Buyers have to run around looking for the best deal.
It is a lot of work to apply for a mortgage at more than one institution. This applies to renewals as well. The bank employee you are likely dealing with is often one of the more junior, who may have only handled a few mortgage applications to date, and who may not have a mortgage of their own.
For this reason, we have been supportive of the mortgage broker role in a real estate transaction. We find that a good mortgage broker can provide a very valuable service to a buyer. There is no cost to the buyer as the mortgage broker is paid by the institution you end up choosing. And the fact that it is a one-stop shop is invaluable. You apply with the mortgage broker, and he or she then looks for the best deal for you.
Why is it that only one of the big banks is advertising their best rate upfront? We don't know. It is a competitive business so likely others will follow. Know going forward that the posted rate can often be improved upon. Be sure to ask for the best rate. Then if you are doing this without a mortgage broker, be sure to shop around for the best rate. Go back to the bank you like and get them to match. Get the supervisor if you have to. (Apologies to all of the young bank employees who are just getting started in their careers.)
THE STRESS TEST
First time buyers are well aware of the Stress Test. When renewing your mortgage, you should also be prepared for it .... What exactly is the Stress Test you ask? To qualify for a mortgage loan at a federally regulated lender, you will need to pass this “stress test”. That is, you will need to prove you can afford payments at a qualifying interest rate which is typically higher than the actual rate in your mortgage contract (currently this is a full 2% on top of the posted interest rate). The qualifying interest rate your lender will use for the stress test depends on whether you need to get mortgage loan insurance, or whether you have at least 20% of equity on your purchase.
Everyone wants to see buyers with skin in the game, hence the incentive to have a 20% downpayment or equity in the purchase. You can get a mortgage without the 20% but it will cost you. A mortgage insurance premium is added to the rate you will pay. The stress test is applied to this higher rate.
Note that credit unions and other lenders that are not federally regulated do not need to use this mortgage stress test. If you or your spouse are self-employed, the difficulty you will have to qualify is compounded. A good mortgage broker can source a lender that is able to work with all types of clients' needs.
A good mortgage broker will also be able to give you advice on putting your best foot forward on an application. Advice such as ways to get a good credit rating, or what not to do before you close on that house are invaluable. (An example? Getting that new car lease between getting your pre-approval and making the actual purchase will be an issue. That lease payment wasn't on your pre-approval application but it will now factor into your mortgage approval at the Closing on that new house that you are under contract for.)
INSTANT MORTGAGE APPROVALS? Don’t ever believe that this headline could even be possible. One can obtain a conditional approval very quickly. But much depends on the verification of income, debt, employment and finally – the appraisal of the home that you are purchasing. You still need to copy T4s, income tax returns, employment letters etc and send all that is required in to the bank or mortgage broker. It is a manual review believe it or not, and these take time.
Getting pre-approved is still important to do before you start to look. Obviously you cannot get full and final approval until you know what you are buying and the lender sends in their appraiser to take a look at what you have put an offer on. (A conditional offer pending financing approval - sound familiar?) But this pre-approval tells you the maximum your income/debt will allow. It is an IMPORTANT and CRUCIAL first step for a first-time buyer.