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Conventional vs. high-ratio mortgages: which is cheaper?
If you’re buying a home in Canada, there are two main types of mortgages based on the size of your down payment: a conventional mortgage or a high-ratio mortgage.
A conventional mortgage refers to a contract where the homebuyer has put at least 20% of the home’s price toward the down payment. For example, if a home costs $550,000, you’ll need a down payment of at least $110,000 to secure a conventional mortgage.
A high-ratio mortgage refers to a contract where the homebuyers put down less than 20% of the home’s price as down payment. With a high-ratio mortgage, buyers are required to purchase mortgage default insurance, which protects the lender if you stop making your mortgage payments. There are three providers who offer mortgage default insurance: Canada Mortgage and Housing Corporation (CMHC), Genworth Financial and Canada Guaranty.
High-ratio mortgage rates are slightly lower than conventional mortgage rates, but the cost of default insurance will add to the total cost of the mortgage.
Conventional 5-year fixed mortgage rates vs. high ratio 5-year fixed mortgage rates in British Columbia
|Date||Average Conventional Rate||Average High Ratio Rate|
Last Updated: May 1, 2021
Fixed rate vs. variable rate mortgages: which is cheaper?
The most important decision for homebuyers, next to finding a home, is deciding which mortgage rate suits your financial needs. There are two types of mortgage rates: Fixed rate and variable rate.
With the best fixed mortgage rates B.C., it's guaranteed that the interest rate will stay the same for a specific period of time. With this type of rate, you will always know exactly how much your mortgage payments will be. Fixed-rate mortgages are more popular than variable rates in Canada, particularly the 5-year fixed mortgage. Fixed rates can be secured up to a term of 10 years, but homebuyers who want to avoid locking in a long-term mortgage rate can seek out a term as short as six months.
Variable mortgage rates in B.C. and the rest of Canada can fluctuate throughout the term of the mortgage based on market conditions. The pro for some homebuyers is that if current mortgage rates decrease, more of your mortgage payment goes toward paying off the principal. If rates increase, more of the payment goes toward interest. The downside of variable mortgage rates is that some homebuyers may not like the uncertainty of fluctuating rates. It’s best to talk to your mortgage broker about your specific needs.
Take a look at 5-year variable vs. 5-year fixed mortgage rates in B.C. over the last year.
5-year fixed vs. 5-year variable mortgage rates in British Columbia
Last Updated: May 1, 2021
Factors that affect your British Columbia mortgage rate
The best mortgage interest rates available in British Columbia and across Canada are influenced by a variety of factors. When deciding whether to approve your mortgage and what rate they can offer, lenders have to consider certain financial elements that could increase or decrease their burden. Here are the main factors that will affect your mortgage rate:
Down payment: The most important factor to consider is how much cash you have to put toward your down payment. Your B.C. mortgage loan will be determined on the size of your down payment, which ultimately cascades into how you acquire the best possible mortgage rate for your situation. In B.C. and across Canada, there are minimum down payment rules based on the price of the home.
- For homes that cost up to $500,000: the minimum down payment is 5%
- For homes that cost between $500,000 and $1 million: the minimum down payment is 5% of the first $500,000, plus 10% of the remaining amount
- For homes that cost $1 million or more: the minimum down payment is 20%
Remember, if your down payment is less than 20% of the home’s price, you’ll need to get mortgage default insurance.
Debt service ratios: Besides your down payment, another factor affecting your B.C. mortgage rate is your debt service ratio. Lenders will look at two different ratios: gross debt service ratio and total debt service ratio.
Gross debt service ratio (GDS): Also known as a housing expense ratio, this is a measure of all of a borrower’s monthly housing expenses. The mortgage payment is the primary expense and the other expenses include tax, home insurance, utility bills and 50% of condo fees (if applicable). The lender will divide the expense by your gross annual income (gross means before taxes). If the resulting debt ratio is less than 35% of your income, your lender will feel confident in your ability to cover all your housing costs.
Total debt service ratio (TDS): Lenders calculating your TDS will take the same expenses included in the GDS ratio, plus any other debt repayment obligations such as a personal loan or car loan, line of credit, credit cards, etc. If all debts divided by your gross annual income is less than 42%, lenders will be more willing to lend you money. If the ratio lands above 42%, lenders might feel your ability to meet your monthly expenses, including mortgage payments, is diminished.
Credit score: Your credit score and credit history are used by lenders to identify the likelihood that you will pay your bills on time. Having a high credit score is a layer of protection that allows you to secure the lowest mortgage rates in B.C. Your credit score is created when you borrow money or apply for credit for the first time.
The score itself is measured as a three-digit number ranging from 300 to 900. The lower your score, the more risky you are considered to be to lenders. The higher your score, the less risk you are considered to be. Credit scores can fluctuate over time based on your credit management choices. Missing payments, a higher number of credit applications, a record of bankruptcy and consistently carrying a high balance on your credit cards, along with a host of other elements, can negatively affect your credit score.
Each mortgage lender will have their own minimum score requirements, but most major Canadian financial institutions want to see a credit score of at least 600. If you’re required to buy mortgage insurance because your down payment is less than 20% of the home’s purchase price, the CMHC requires a credit score of at least 680. Acquiring a mortgage in B.C. with bad credit will make it more difficult to find a lender and will be a more expensive proposition.
Employment and income: B.C. mortgage lenders want homebuyers who have a stable and predictable income. They will assess your main sources of employment and income, such as a salaried job, as well as income from investments or rental properties.
Length of employment and the type of employment will be looked at very closely by lenders. Seasonal or casual workers may find it more difficult to acquire cheap mortgage rates, or any loan approved, given the variability of their income. Self-employed workers will be required to provide tax returns for the last three years of operation, as well as other financial disclosures such as income statements, balance sheets and/or business or GST or PST licenses.
Typical mortgage amounts in British Columbia
A “typical” mortgage amount depends on where you live, the price of the home and the size of your down payment. In 2021, the average price of a house in B.C. rose by 15.9% to $843,830 from last year’s average price of $728,269. That’s slightly below the Canadian average, which grew 22.8% in the same period.
On a home that costs $843,830, a 20% down payment would come to $168,766. The remainder, $675,064, would be the remaining mortgage amount.
Of course, that amount only represents the principal amount of the mortgage, and does not include interest payments. That’s more difficult to calculate as it depends on the mortgage rate acquired, which is different in each situation, and the amortization period of the loan.
The payments on a typical house in B.C. could be even higher when you take into account the CMHC down payment rule of mortgage default insurance, if the down payment is between 5% and 20% of the original price.
British Columbia housing market and home prices
The housing market in B.C. has been booming for years. Prices in the highly-populated areas of the province can reach high heights, with the benchmark price of a home in Greater Vancouver being $1,056,600 as of January 2021. Within Vancouver, the benchmark cost of single detached homes rose to $1,576,600, an increase of 10.8% year-over-year. Vancouver townhomes rose to 815,500, up 4.3%, and condominiums rose to $680,800, up 2.2%.
In real estate, location is key. However homebuyers who have the ability to search different areas will see how much average B.C. house prices can fluctuate depending on where you want to settle.
For example, here’s a list of average prices for different areas of B.C. in January 2021:
- Vancouver Island: $559,300 (up 11.7%)
- Victoria: $742,600 (up 5.6%)
- Kamloops: $504,583 (up 22.3%)
- Fraser Valley: $900,600 (up 9.3%)
- Northern B.C.: $339,608 (up 12.6%)
- Greater Vancouver: $1,056,600 (up. 5.5%)
British Columbia closing costs and land transfer tax
Closing costs are fees beyond the purchase price and mortgage payments that you need to finalize the deal on your home. These costs are usually paid on the closing date of your purchase and can run between 1.5% and 4% of a home’s selling price. It makes sense to budget some money for these expenses, but each situation is different and the actual costs will depend on factors such as where you live, the type of home you’re buying and whether it’s a new build or older home. Closing costs include:
- Title insurance
- Mortgage default insurance (if applicable)
- Property valuation fees
- Home inspection fees
- Legal fees
- Home insurance
- Property transfer tax
- Utility hook up
- Moving costs
- Good and services tax (GST) or harmonized sales tax (HST) if you’re buying a brand new home or condo
- Estoppel certificate if you’re buying a condo
Land transfer tax in B.C. is based on the fair market value of the land on the day it was registered with the Land Title Office. Transfer tax should not be confused with annual property tax, which is paid yearly to your municipal tax office.
General Property Tax: This applies to all taxable transactions. The rate is 1% of the fair market value up to and including $200,000, 2% if the value is between $200,000 and $2,000,000, and 3% if the value is greater than $2,000,000.
If a property is worth more than $3,000,000, a further 2% tax will be applied to the property.
B.C. Foreign Buyers Tax: In addition to property transfer tax, foreign nationals must pay an additional 20% to the purchase price of a residential property in Metro Vancouver. In 2018, the tax was extended to Fraser Valley, Capital, Nanaimo and Central Okanagan Regional Districts.
Your questions about British Columbia mortgages, answered.
What’s the difference between a mortgage term and an amortization period?
Time plays a critical role in calculating B.C. mortgage rates. There are two key measures of time: the length of time your current mortgage rate is locked in, and the total amount of time it takes to pay off your mortgage.
Mortgage term: The mortgage term refers to the amount of time you’re locked into your mortgage contract. This includes the rate, lender and the contract’s terms and conditions. At the end of the term, you’ll be able to renew your mortgage contract at a new rate. Homeowners repeat this process until they pay off the principal of their mortgage. A mortgage term can vary in length from six months to 10 years, but the most popular term in Canada is five years.
Amortization period: The amortization period refers to the amount of time it takes to pay off the principal of your mortgage. In Canada, the maximum amortization period is 35 years. If your down payment is less than 20%, however, you’ll have to purchase CMHC mortgage insurance. The maximum amortization period on insured mortgages is 25 years.
What’s the difference between an open mortgage vs. a closed mortgage?
Purchasing a home in B.C. comes with a myriad of decisions. Once the location has been selected and the choice between fixed or variable mortgages has been decided, buyers will want to consider their options between an open or closed mortgage.
Open mortgage: An open mortgage allows you to pre-pay any amount of your mortgage at any time without penalty. Interest rates are typically higher than closed mortgage rates in B.C. These mortgages provide flexibility and freedom to pay what they want and terms are generally shorter.
Closed mortgage: A closed mortgage has a more attractive interest rate than an open mortgage mainly because the homebuyer is limited by how much extra they can pay into the mortgage each year. Typically, these are more popular options. Closed mortgages still have lump sum payment options and prepayment options that allow you to pay your mortgage more quickly.
How much does it cost to live in British Columbia?
The cost of living in British Columbia can be as diverse as the many regions within the province. Costs will fluctuate depending on whether you rent or own your home, whether you drive or commute to work, and of course which part of the province you settle in.
For example, Vancouver is one of the most expensive cities in Canada to live in and can be difficult for new homebuyers when considering entering the housing market. However, outside city limits and into more rural areas, homebuyers may find they can buy more with less and keep costs of living down within less populated areas.
One of the biggest expenses in B.C. is the cost of car insurance. The Insurance Bureau of Canada says that B.C. has the highest rates in Canada with an average rate last year of $1,832 — second only to Ontario.
B.C. is also very attractive for its temporal climate and boasts a healthy retirement population, especially in Victoria. Tourism and trade are also very important to B.C. making it a relatively expensive destination for residents and visitors.
How much does getting a lower interest rate matter in British Columbia?
B.C. is definitely an expensive destination for both first-time and seasoned homebuyers. Larger cities have seen substantial increases in home prices in just one year. Finding the best mortgage rates in B.C. is paramount, but it’s not the only way to ensure affordability of your mortgage. Other features can help, including:
Prepayment privileges: Some lenders will offer prepayment privileges, which give the homebuyer the right to pay off part or all of their mortgage balance prior to maturity (ahead of schedule) without penalties. Substantial savings can be had by saving on future interest payments.
Penalties for breaking a mortgage: Some lenders will charge a fee if you pay more than the allowed additional amount on your mortgage, break your contract, transfer your mortgage to another lender before the end of your term, and pay back your entire mortgage before the end of your term. Avoiding these events will prevent extra fees, but homebuyers need to calculate the pros of breaking a contract in order to get a better rate and/or pay off the mortgage in full.
Porting your mortgage: It’s not unusual to consider moving houses before your mortgage is paid off. Porting your mortgage means taking your existing mortgage, with its current rate and terms, and attaching it to your new home. Porting can generally occur if you are purchasing a new home at the same time you are selling your current home. This can help save on penalties and fees in the future.
Your questions about LowestRates.ca, answered.
How are mortgage rates determined on LowestRates.ca?
LowestRates.ca works with 75+ banks and brokers to bring you the best mortgage rates from lenders in Canada, including B.C. We work with our partners to obtain their best deals and offers, and then we let them compete for your business. All you have to do is answer a few questions, and in minutes you’ll be provided with today’s mortgage interest rates for B.C. There’s no obligation, but you can choose to speak with our broker partner to secure your best rate and see if you're eligible for more savings.
Is it safe to get a mortgage online?
Yes, it’s safe — you no longer need to visit a bank branch or mortgage broker’s office in person to apply for a mortgage. It’s becoming increasingly common for Canadians to apply for mortgages online. LowestRates.ca only works with reputable, trustworthy financial institutions. Your credit score won’t be affected and your information is secure. We don’t share your information with anyone unless you want to connect with a mortgage broker. We take care of the heavy lifting by comparing the market for you and can connect you with the best mortgage lenders not only in British Columbia, but across the country.
How do I know I’m getting the lowest rate?
We have a strong selection of lenders on LowestRates.ca, including the big banks and many independent providers, and we’re adding more lenders all the time. This ensures we’re always delivering you a competitive rate. Even if you’re not ready to commit to anything, you can use our site as a starting point for research (it’s totally free, and you’re under no obligation).
The better informed you are, the more likely you'll negotiate a better deal for yourself. And, really, that’s what we care about the most.
This offer condition can save you a lot of headaches on existing homes and even new builds.