Mortgage Rate Comparisons

When looking at the different rates of mortgages, it is important to understand where it is that your interest costs come from. Lending rates for banks are defined by a set ‘prime’ rate, at which banks may borrow from institutionally. The prime rate is universal, and will dictate what your interest rate will be as a number that is added to the prime rate.

How many percentage points are added to your personal rate will depend on your credit score. For example, if you are a model borrower with a good credit score, you’ll qualify for something similar to prime+1, prime, or maybe even prime-1. If you are a first-time mortgage borrower with a stable job and some small credit score, you might be more eligible for prime+2 or prime+3. Further down the spectrum, we begin to see what are commonly referred to as sub-prime loans.

A sub-prime loan is extended to individuals that are either holding bad or no credit scores. It is generally extended at an extremely unfavourable rate, as the borrower is expected to default, or the equity value of the home is expected to decrease over the short-term. Rates such as prime+5 are not unheard of in this sort of scenario.

Alternatively, banks have been known to offer ‘split-rate’ mortgages to sub-prime borrowers who are expected to increase their standard of living in the future. They will offer them a loan that starts off with a low interest rate for a year or two, and will then convert the loan to a much higher interest rate after that period is up.

While this presents an excellent opportunity for an individual that is able to pay off their entire mortgage (with early repayment penalties) in that early period, increase their credit score over that period, or increase their earnings so as to be able to renegotiate or better pay off the higher rate, it is important to remember that split-rate mortgages are extremely unfavourable over the longer time.

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