Mortgage Lending: A Dive into Rate Buying & Pricing Strategies

In the competitive world of real estate, understanding mortgage lending is crucial. As mortgage rates continue to trend upwards and prices continue to rise, it's important to gain some understanding on topics surrounding  mortgage lending that many people are unaware of. This includes the idea of ‘buying down the rate’ and ‘pricing homes for affordability’, which have been more popular concepts in the U.S and are rapidly gaining traction in Canada.

Buying the Rate Down

A mortgage financing technique with which you pay to be able to offer a lower rate to new home buyers. Chartered banks are offering somewhere between 5%-5.2% for a five year fixed mortgage. When you buy the rate down, you as a builder, would pay the lender a lump sum up front to lower the mortgage rate to a predetermined rate. For this to occur, you will need to find a lender willing to participate. They’ll require things like the name of your home building company, name of the project, project location, number of units, price range of the units, and the expected closing dates of the units. You also will need to determine which rate you want to buy down to, within reasonable limits the more you buy the rate down the more your costs to do so increase.

Why is This Smart?

When the majority of buyers are looking at a home, they often focus more on what monthly payments they can afford, rather than the sticker price. By buying the rate down, more homeowners would act on the lower rates. For instance, our team has the ability to connect our homebuyers with a lender that can offer them a five-year fixed rate mortgage, as low as 4.39% for a high-ratio insured mortgage, This is a significant advantage for our clients. Can you imagine the interest you would see on your homes if you could offer home buyers a 5 year fixed rate of 2.99% while the market rate is 5-5.2%.

Price Your Home for Affordability

The next intriguing aspect we want to discuss today is the idea around pricing your home for affordability. Most people don’t look into the core details of mortgage lending and what it looks like in Canada so, let’s dive in. The common belief among many, is that the minimum down payment is 5%, which is partially true.In fact, the minimum down payment is not a fixed percentage, instead it varies depending on the purchase price.  When buying a home between $0-$500,000, the minimum down payment is 5%, However, for every dollar above $500,000, the down payment increases to 10%, up to $999,999. As soon as a purchase price hits $1,000,000, the mandatory down payment becomes 20%

It’s also important to note that once you put 20% down, you no longer can get an insured mortgage. In Canada, your rates are higher with an uninsured mortgage, typically by 0.2%.

Let’s put this into perspective. Say you are planning to list a home for $1,000,050, the down payment is 20% (just over $200,000). If you can downsize, remove some features, and lower the price point down to $999,999, the minimum down payment requirement is now 10%( $75,000). By changing the price by $1, the down payment requirement changes from $75,000 to $200,000, a $125,000 difference. The buyers also face higher rates with a higher purchase price and without the ability to secure an insured mortgage some lenders just won’t touch the deal. 

We’ve partnered with NESTO to help you find the best mortgage rates!

Nesto is Canada's first digital mortgage finance company. With a team of mortgage experts from across Canada, Nesto believes in offering you the best rate from the start. Their mission is to provide clients with a seamless, transparent financing experience. The commission free experts at Nesto work tirelessly to find you the lowest rate possible. With a high ratio mortgage, find rates as low as 4.39%

Find your low mortgage rate with nesto or get $500! You shouldn’t have to go bank to bank to secure a solid rate:

Should you have any questions regarding mortgage lending, or need lender recommendations, please reach out. Stay tuned for more informative blog posts like this and feel free to browse through other blogs, so you can stay in the know!

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