Why Are Mortgage Rates for Buying Lower Than the Rates for Refinancing in Canada?
Introduction
Interest rates play a crucial role in the real estate market, influencing both home buying and refinancing decisions. In Canada, and in Ontario, it’s not uncommon to find that interest rates for buying a home are often lower than for refinancing, especially for insured and insurable mortgages. This article explores the reasons behind this trend in the Canadian mortgage marketplace, and explains why refinance rates may be higher than purchase rates.
Understanding Interest Rates
Interest rates are determined by a variety of factors, including the Bank of Canada’s policy, inflation, and economic conditions. Brokers, such as TheBroker.ca Ltd., work with various lenders that offer variety of rates for home purchases and refinances based on these factors and the perceived risk associated with each type of mortgage.
Risk Assessment and Interest Rates
Lenders often view refinancing as a higher risk compared to home buying. This is because home purchase mortgages are insured or insurable under certain conditions, such as the amount of the down payment or the remaining equity in the property, and the insurance covers the lenders against a default by the borrowers. As a result, lenders mitigate this risk by charging higher interest rates for refinancing.
Market Conditions and Competition
The real estate market conditions and competition among lenders also influence interest rates. In a competitive market, lenders might offer lower interest rates to attract homebuyers. However, the same competitive pressure might not apply to refinancing, leading to higher rates. The reason could be that lenders sell the mortgages to investors, or other financial institutions, and if the mortgages are not covered by a default insurance, they are not as attractive of an investment as the mortgages with default insurance.
Insured, Insurable, and Uninsured Mortgages
In the context of prime or bank lending in the Canadian mortgage landscape, there are three categories of mortgages with respect to default insurance: insured, insurable, and uninsured.
Insured Mortgages
Insured mortgages are those where the borrower pays for default insurance, which covers the lender in the event of a mortgage default. These mortgages are typically mandatory when the down payment is less than 20%. Since the borrower covers the cost of this insurance and the lender does not incur any additional insurance costs, lenders typically offer the lowest rates to borrowers with insured mortgages.
Insurable Mortgages
Insurable mortgages satisfy most of the same criteria as insured mortgages, but they require a down payment or equity of 20% or greater. The borrower has greater equity in the home, and lenders can opt to take out insurance on the mortgage to further hedge the risk of default. The mortgage rate may be higher than an insured option, but less than an uninsured one.
Insurable mortgages are typically used in two scenarios:
- Transfers or Switches: This is when a borrower switches their mortgage from one lender to another usually at the end of their term, and the borrower is not required to pay for the insurance premium. In most cases the mortgage was previously insured, or it will be bulk insured by the new lender.
- Down Payment of 20% or More: Insurable mortgages can also be used when a borrower is making a down payment of 20% or more. In this case, the mortgage can be insured, but it’s not mandatory. The lender can choose to insure the mortgage and pay for the insurance premium themselves.
It’s important to note that insurable mortgages are not available for refinances or on properties with a purchase price of more than $1 million. Also, they must meet the same eligibility requirements as insured mortgages, such as a credit score above certain level, and debt service ratio limits. They also must pass the mortgage stress test, with certain exceptions, and have a maximum amortization of 25 years.
Uninsured Mortgages
Uninsured mortgages apply when the buyer has made a down payment of more than 20%. These mortgages are deemed uninsurable, meaning the lender shoulders all the risk. The mortgage rate offered to the borrower will be higher to reflect this, hence the interest rate charged will be higher.
Conclusion
Understanding the reasons why interest rates for buying a home in Ontario can be lower than for refinancing can help homeowners make informed decisions about buying and refinancing homes. As always, it’s important to consult with a knowledgeable mortgage broker, such as TheBroker.ca Ltd., to understand all the factors that go into these rates and to find the best solution for your situation.
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This article was brought to you by TheBroker.ca Ltd., a mortgage brokerage that is licensed with the Financial Services Regulatory Agency of Ontario (FSRA), which regulates businesses in the financial sector. The Principal Broker Sash Trajkovski has over 20 years of real estate and mortgage experience in the Ontario marketplace. You can verify our licenses by visiting the following links from FSRA’s website: our corporate license and Principal Broker license. Our mortgages services are available to all residents of Ontario.
