Why Mortgage Payments Matter More Than Mortgage Rates
When shopping for a mortgage, clients are probably looking at rates, not realizing that they should be asking their mortgage broker about payments. Of course, they want the lowest interest rate they can get, but the rate tells them nothing about what they can afford, the most critical part of making a mortgage decision.
You can put your client at ease by explaining that rates are only one part of the larger financial picture. Sometimes lower rates come with restrictions that are not in the client’s best interest. As their broker, you can guide them through a discussion about their finances and then steer the conversation to what really matters—the monthly mortgage payment.
What monthly payment can borrowers afford?
One of the first conversations with your client should be about what they can afford to spend on a mortgage payment. They may have some idea about what payments they want to make, or maybe they have a specific property in mind. You can help them calculate their debt servicing ratio to determine how much they could comfortably spend on housing costs.
You’ll verify their income, check their credit and shop around for rates. Then you’ll come back with the great news about a manageable monthly payment.
What about that mortgage rate?
You will need to talk about the mortgage rate, and it may not be as low as the one their friends got or the special rate they saw advertised. Explain that this is not the number they should be focused on because everyone’s situation is different. In addition, many of those advertised rates have special conditions attached.
If you’re looking at an alternative mortgage for your client, you know they aren’t a fit for a big bank mortgage. Best to shift focus away from the fact they’re not seeing the lowest rate possible because of their credit or non-traditional income sources – there are ways to talk about this issue.
Explain that several factors go into determining a mortgage rate. A person’s credit history and income does matter, but lenders also look at things like amount of the mortgage, amount of the down payment, length of the term, amortization, prepayment privileges, and other features of the mortgage.
Example: Mortgage payments on $300,000
Let’s say your client will have a $300,000 mortgage. An alternative lender is offering a 1-year term at 3.99% while one of the big banks is offering a similar term for 3.39%. Your client can’t qualify for a mortgage at the big bank and is questioning the higher rate you’re proposing.
The table shows the small difference this makes in the monthly payment— while they pay a little more each month, they can get their mortgage today. Focus on the affordability of the payment and how that works within their monthly budget.
|Alternative lender||3.99%||1 year closed||$1,576.43|
|Big bank||3.39%||1 year closed||$1,512.10|
What’s an alternative mortgage anyway?
If your client is concerned about an alternative mortgage product, talk about why they’re a good thing and a common option since new mortgage rules were released in 2018.
Alternative mortgage lenders are looking at people, not numbers, but there is some risk in doing that which reflects the higher rates. Once the mortgage term is up, your client may be in a position to qualify for a lower rate. An alternative mortgage helps them do that.
When you focus on helping your clients get into that house or buy that rental property in a manner they can afford, you’re helping them achieve their life goals.
If you have questions about our rates and mortgages, contact us and talk to one of our underwriters or business development managers.