Why do Different Lenders Offer Different Mortgage Rates?
Purchasing any type of real-estate, whether it’s your first home, your fifth home, or your forever home, is always going to be a challenging process. There are countless details to take care of, paperwork to go over and sign, and meetings to attend.
One of the major details that people often forget about or are confused about, is shopping around for the best possible interest rate. It can be easy to forget that not everyone will be offered the same interest rates or can qualify for the same rates. Let’s take a look at why interest rates vary from lender to lender so that you can be as equipped as possible to shop around for a rate and mortgage that works for you.
Lenders and Banks are Businesses
Something that people often forget is that lenders and banks are businesses, businesses that provide a much-needed service but are also looking to make a profit on that service and compete with other similar businesses. This means they’re looking to get prospective home buyers to apply for a mortgage with them and not all the other lenders in the same location. To achieve this, lenders will more often than not advertise the best possible interest rate they can provide a borrower with. This does not mean that every borrower that applies for or gets approved for a mortgage will be eligible for this low interest rate.
Changes to the Canadian housing rules are being put into place, read this to see how you’ll be affected.
Why is my Interest Rate Different Than my Friend’s?
There are two main reasons why your mortgage interest rate is different from your parents’, or your neighbour’s or your friend’s. You are the first reason and your lender is the second reason.
Who you are as a borrower greatly affects the interest rate you’ll qualify for. Do you have good credit? Are you currently employed? Are your job and income stable? How much of a down payment have you been able to save? If you’re in the process of looking for a mortgage and you’re confused about the types of interest rates you’re being offered, you should ask yourself the above questions.
Mortgage interest rates depend on a lot of variables because all borrowers are different. It would be next to impossible to offer every single prospective home buyer the exact same interest rate, as they are not all the same type of borrower. When shopping around for a mortgage, keep in mind that your interest rate will be affected by the following variables:
- The type of mortgage do you want. Fixed or variable? Closed or open?
- Your credit score
- What house you want to buy
- How large of a loan you need
- How much other debt you currently have
While we understand that it can be very tempting to compare your interest rate to the interest rate your neighbours or friends have, it will likely only cause you more stress. As we explained above, there is no one interest rate that is perfect for every borrower. If a friend of yours applied for their mortgage several years before or after yours, it’s very likely that they will have a different interest rate than you because of this. It’s also likely that a neighbour of yours could have a lower interest rate than you even if you purchased your homes around the same time.
Click here to check out our infographic on the cost of buying a house in Canada.
The second main reason why your interest rate is likely different from the majority of homeowners you know is because of the variety of different lenders you all received your mortgages from. If you applied for a mortgage from an established bank, your friend applied for a mortgage from a credit union, and your neighbour applied for their mortgage from a smaller bank, you all probably have different rates. This is because most lenders have different strategies when it comes to offering competitive interest rates. Lenders, banks, and credit unions typically all have:
- Different profit goals
- Different levels of competition
- Different marketing strategies
Simply put, if you’re looking to get a mortgage from a big bank because you like their reputable nature, whose main goal is profit, your interest rate is going to be higher than someone who got their mortgage from a credit union whose main goal is taking on new clients.
All of this is why the majority of financial experts, and probably your parents too, suggest you shop around for a mortgage. Interest rates vary so if you’re interested in saving as much money as possible you need to get a few quotes and compare your options.