Can a Larger Down Payment Result in a Lower Rate?
As many are looking to purchase a home in 2023 following the pandemic, they are often swayed by the idea that they have to put down at least a 20% down payment.
This is a tale as old as time, one that we mortgage brokers are often shaking our heads at!
While a 20% downpayment is certainly a great goal to work towards, it is not the only way you can get a lower rate. Depending on how large of a down payment you put down, you are able to qualify for a lower interest rate.
If you have the ability to put down a higher down payment, you will certainly reap the benefits when it comes to your interest rate. Let’s dive in!
Why Does a Higher Down Payment Lower My Interest Rate?
Here in Canada, your mortgage loan amount is divided by your property’s appraised value in something called a Loan-to-Value Ratio (LTV). When it comes to lenders calculating the interest rate you will receive depending on your down payment, there are various factors that come into play.
Your LTV of the property, credit score, income, and employment status are all frequently used aspects that contribute to the bigger picture: Your mortgage qualifying amount and interest rate.
Let’s say you found the house of your dreams, and are ready to put the various moving parts into motion. After getting approved for a mortgage, you are ready to put in a down payment and are deciding whether you want to put down more or less.
By putting down more money towards your down payment, you are essentially lowering the amount of money you need to borrow from the bank.
This then signifies that your mortgage’s LTV ratio is lower, and will trigger your interest rate to also be lower.
Sounds like a walk in the park? It certainly can be! However, it’s always important to read the fine print and listen to your mortgage broker.
Some mortgage brokers will advise against a higher down payment due to the risk associated with it. Let’s explore this further.
Risk or No Risk?
A larger down payment is often associated with flipping a coin. On one side of the coin, is high risk. On the other, there is no risk.
Depending on your lender, and the amount of down payment you choose to put down on your house, your coin can flip on either side.
While every mortgage broker is different, the risk remains the same. Depending on the various factors that influence your mortgage (such as employment, credit score, and more), some mortgage brokers may stray away from recommending a higher down payment to play it safe.
On the other hand, some mortgage brokers will recommend a higher down payment to decrease your interest rate based on the stated various factors. If they see you have an exemplary credit score, your income is sufficient enough to support it, and your LTV ratio is a number that they are comfortable with, they may recommend it.
Based on these factors, they may deem your LTV ratio as less risky because they see that you are less likely to default on the loan.
However, if there are any areas they may potentially pose a concern, such as your income, they may encourage you not to put down a higher down payment due to the potential risk associated with your payments.
Give yourself options
As you may be able to tell, there are a lot of factors that determine the risk associated with putting down a higher down payment to reduce your interest rate. As such, each mortgage broker is different and will advise you according to what they believe will suit your situation.
That is why it is important to give yourself options when it comes to comparing rates that each lender offers. This allows you to see the entire picture, and not be confined to just one option.
With this in mind, a mortgage broker will help you to see the best rate and terms you can receive depending on your unique financial situation, prompting you to make the right choice when it comes to the amount of downpayment you will put down.
At Arise Mortgage, we will take into consideration each aspect that influences your mortgage rate, and help guide you to make the decision that will best support you as you navigate the market.
Our team is here to support you, every step of the way!