Mortgage vs. HELOC
Toronto homeowners are fortunate in two ways. Not only do they live in a city with an outstanding track record of home price appreciation, but they live in Canada’s most competitive mortgage market (literally).
That competition is a product of multiple factors, including:
The number of lenders
High home prices
A stable economy
Rates.ca makes it easy to find your best mortgage rate from leading lenders and mortgage brokers in the Toronto area. Simply enter your mortgage requirements (mortgage amount, home value, term, etc.) and you’ll instantly see an array of rates meeting that criteria.
From there, focus carefully on the features and restrictions of each rate. The mortgage with the lowest borrowing cost is the one with an optimal combination of upfront interest savings, flexibility, low fees and low prepayment charges.
And don’t dismiss a lender or broker who’s located outside of Toronto. Ontario brokers outside of the city often have better deals. Moreover, mortgages can now be closed electronically, regardless of where your mortgage provider is located.
In large Canadian real estate markets such as Toronto, it pays to do your mortgage homework. Homes are so expensive that the savings from getting a lower rate are magnified.
With the average Toronto home selling for about $900,000 at the start of 2020, that’s roughly 75% more than the average home nationally. That means you’ll pay about 75% more interest, other things equal. A 0.1% savings on the average Toronto home means you’ll pay over $3,000 less interest over five years, assuming a standard 5-year fixed mortgage with 20% down.
The average mortgage rate in Toronto is at least 10 basis points below the national average, the majority of the time. That’s the impact competition has on borrowing costs.
There’s anecdotal evidence to suggest traditional bankers and mortgage brokers who do not buy down rates using their commission are losing market share. We expect this trend to continue in 2020 as more online mortgage providers launch and banks continue to shift more of their mortgage origination to the internet.
The city’s biggest lenders are the usual banks (RBC, TD, Scotiabank, BMO, CIBC) as well as challenger banks (like HSBC, motusbank and Tangerine) and big credit unions (like Meridian).
Toronto mortgage brokers also have a heavy influence on pricing. The likes of intelliMortgage, Butler Mortgage and True North Mortgage drive rate competition because they appear so often at the top of rate comparison websites.
Toronto is a major destination for immigrants and interprovincial migrants looking for employment. Roughly 100,000 people a year move to the greater Toronto area. Add that to its natural population growth, low interest rates, stable employment and expensive land and you have a recipe for further housing price appreciation.
Toronto started 2020 in a seller’s market and that’s where many analysts believe it will end, barring some major economic shock. Supply will increase to offset some of the demand, but likely not all.
In terms of mortgage performance, Toronto mortgage arrears should remain low. Ontario as a whole had rock-bottom mortgage defaults. At the time of this is being written, the latest data shows just 9 in 10,000 Ontario borrowers were 90 days behind on their mortgage payments, versus 23 out of 10,000 nationwide. (Source: CBA). Toronto figures are comparable given its strong job market and equity appreciation.
Toronto has the same mortgages as most other cities. It simply has a higher concentration of certain types. Here’s a quick rundown of each.
A fixed-rate mortgage is when the interest rate and monthly payment stay the same for the term of the loan regardless of how market rates fluctuate. The most popular term is the 5-year fixed, but Toronto has a higher concentration of short-term fixed mortgages than most cities, mainly because its borrowers tend to be more qualified and rate savvy.
A variable rate mortgage is one where your interest rate can go up or down depending on how prime rate moves. If interest rates are declining, a variable borrower enjoys falling interest costs, and vice versa. Despite the popularity of fixed rates, variable rates have proven less costly over the long-run. Toronto has a higher proportion of variable mortgages than most Canadian cities.
By law, homebuyers must make at least a 5% down payment. So, technically, zero-down mortgages don’t exist. But borrowers who get default insurance can borrow that 5% down payment, effectively availing themselves of 100% financing. While only a small percentage of mortgages, these quasi-zero-down mortgages are more prevalent in Toronto than most places because the home prices are so high in the region.
A high-ratio (a.k.a. default-insured) mortgage is one where the borrower has less than 20% equity. Said borrowers must purchase mortgage insurance in order to get a mortgage from a mainstream lender. Toronto has more insured mortgages than probably any other city in Canada.
Open mortgages have higher-than-normal interest rates but allow you to pay the loan off at any time without penalty. Toronto homeowners sometimes use open mortgage when they don’t plan to hold the mortgage very long (for example, when they’re flipping a property). Open mortgages are also handy when you need short-term financing at the end of your term to give yourself more time to shop around for a lower rate.
Interest-only mortgages have considerably lower payments than regular “amortizing” mortgages. That makes them more common in a place like Toronto with its high home prices. The trade-off, of course, is higher overall interest expense given the rate is higher and you’re not paying any principal. Just remember that you must prove you can pass the federal government’s mortgage stress test to get one. That means you have to prove you can handle a regular mortgage payment at a rate that is at least two percentage points higher than your actual rate.
Private mortgages are much easier to get approved for, but their rates are much higher. Private mortgages are in higher demand in an expensive populous city like Toronto. As a result, Toronto has more private lenders than any other city in Canada.
Due to the large amount of equity in most Toronto homes, the city also has higher than average concentrations of equity mortgages (where borrowers can get approved mainly by proving they have a lot of home equity), second-mortgages, self-employed mortgages, commercial mortgages and reverse mortgages.
Just like any other city, getting the lowest mortgage rates in Toronto requires comparison shopping. One cannot rely on just one lender or one mortgage broker if they want to get the best deal.
The right place to start is with a good mortgage rate aggregator (we humbly suggest the one you’re presently reading). That way, you see a large representation of the mortgage market, all at once. It’s especially important to focus on rate sites that show all top lenders. Unlike rates.ca, most others don’t.
If you’re looking for a good roadmap to finding deals, here’s a simple four-step process to securing the mortgage with the lowest borrowing costs:
1. Get solid advice on the right mortgage term given your five-year plan
2. Identify the lowest rates for that term
3. Ask them to list all material features and limitations of the rate in question
Rates have been trending sideways in Toronto for the last five years. The ebs and flows are caused by changes in Canada’s bond yields (driven by Canadians economic developments and international rate movements, particularly U.S. rate fluctuations) and the overnight rate (which is set by the Bank of Canada).
Note: The rates in this chart are as of year-end.
Definitely not. Rates in Toronto are highly competitive, which means you’ll find providers advertising ultra-aggressive rates. Many of those rates have restrictions that could cost you more after closing. When two rates are close, use a mortgage calculator to compare the total interest cost. You’ll find that the difference is quite small and secondary to the contract terms.
Absolutely. If you choose to use a broker, focus on those with experience because they’re more likely to make recommendations that can lower your total borrowing costs. Try to find a broker with at least two years in the business as a full-time agent and at least $10 million of closed mortgage volume. If you’re getting a prime mortgage (i.e., you have great credit, provable income and a reasonable debt load), look for a broker who doesn’t mind buying down the rate. A rate buydown is where the broker trades their commission to lower your interest costs.
The main things that determine how much a mortgage will cost you are the:
The ideal mortgage is the one that best balances these factors.
The “best” mortgage changes constantly as lenders adjust their rates. That means the best mortgage lender changes frequently as well. For this reason, focus less on the lender and more on the rate and contract terms. The lender’s brand name is almost irrelevant. For example, TD is a well-known lender, but its rates are often higher than a less-known lender like MCAP. But the latter has much more favourable terms (e.g., MCAP’s prepayment charges are lower and its mortgages are standard non-collateral charges, which can reduce switching costs at maturity).