5 Ways to Get a Lower Mortgage Interest Rate

As we know, the inflation rate directly impacts our cost of living and mostly affects the rentals. However, as stated by the IMF, the inflation rate in 2024 will fall by 5.8% compared to previous years. This is good news for many, but not as good as buying your own home.

The amount you pay on rentals can not make you the owner of the house, so how about putting your hard-earned money into mortgage interest? At least in the end, you will have your own home.

Do you know the national average mortgage rate on a 30-year fixed mortgage is 7.30% in 2024, as stated in reports? Previously, it was just 7.08% in 2023. This is alarming for people who are interested in buying a house on a mortgage, as with each passing year, the rate keeps increasing.

Buying a house is every person’s dream, and with this increasing rate, this dream will turn out to be a nightmare. Therefore, it becomes mandatory to secure a favourable mortgage interest rate that shouldn’t come at the cost of a financial burden, leaving you compromising your lifestyle.

Let's say a 30-year loan of $300,000 sees a mere 0.5% decrease in the interest rate. This means thousands of dollars saved, and that money can be used for other things in your life, like retirement savings, education for your children, or simply enjoying your new home without financial worries.

You might be wondering how on earth you can get a lower mortgage interest rate. Well, there are ways you can achieve lower rates without overburdening yourself, and for this, you should know how mortgages work. The methods involve building strong credit scores, increasing your down payments, managing debts, and much more. Read on to know!

The 5 Ways to Get a Lower Mortgage Interest Rate

When it comes to mortgages, people often mix it up with home equity loans, or they end up taking the home loan to pay their remaining mortgage. Why should you be doing that? Understand the debate of mortgage vs home equity loans to know why this is not the best way to deal with the financial burden of owning a home. But don’t worry, as we have plenty of other ways to get a lower mortgage interest rate.

No. 1: Build a Strong Credit Score

The fundamental behind a credit score is that the higher you score for credits, the lower the risk you will impose on your financial institution. In other words, if your credit score is high, the financial institution will see you as less threatening and give you a loan, even on a small down payment or interest fee.

That’s the reason why your credit score plays a huge part in securing a favourable mortgage interest rate and qualifying for a mortgage in Canada. As per our research, the minimum credit score a person requires to get a house on the mortgage in Canada is 680, and after 680, it is considered an ideal score. This ideal score will translate to a lower interest rate on your mortgage loan.

In the aftermath, you enjoy the perks of savings throughout the life of your loan, freeing up valuable resources for other financial goals. Here is how you can build a strong credit score:

Obtain and Review Your Credit Report

Keep an eye on your credit performance to assess ways to improve it. When you regularly access your credit report from a reputable credit bureau, you can immediately identify any errors or inaccuracies.

If you find any issues, you can file a complaint promptly with the concerned authorities. This will help you in ensuring that your credit report accurately reflects your creditworthiness. You can get a free credit score report from a reputable finance manager.

Maintain a Consistent Payment History

Well, this may sound obvious, but many of you might take this for granted and end up regretting it. When you pay your bills on time, every time the bill shows up, you indicate to your lender that you are punctual about your payments.

For those who are wondering, ‘Should I pay off my mortgage early?' yes, you should, as this can also improve your payment history as late payments reduce your discount points. On the other hand, paying late damages your score and negatively impacts your mortgage eligibility and interest rate.

Manage Credit Utilization Effectively

Let's keep it to the point! Credit utilization means the number of credits you are consuming compared to your total credit limit. For example, if you exceed your credit limits, you will have a bad credit report, but if you keep it lower than the limit, you will maintain a good image for your mortgage lenders. So, try to maintain a low credit utilization ratio, ideally below 30%, to demonstrate responsible credit management to lenders.

All of these add up to building a positive or good credit history. But, when you have a limited credit history, try using a virtual credit card responsibly and making timely payments to establish a positive track record. Or you can build your credit with KOHO to form responsible credit habits.

No. 2: Make a Strategic Down Payment

Well, if you are making a larger down payment, you will have a lower loan amount to borrow. So, this strategic bigger down payment not only reduces the overall burden of the loan amount you need to borrow but also improves your loan-to-value ratio (LTV) in the eyes of lenders.

This LTV means the percentage of the property's value you're financing compared to the amount you're putting down upfront. A lower LTV means you are a less risky borrower, making you eligible for more competitive mortgage rates.

If your mortgage down payments in Canada are less than 20% of the purchase price, you're typically asked to pay private mortgage insurance (PMI). This is an additional monthly cost that can increase your overall mortgage payments.

No. 3. Consider Mortgage Refinancing

This is unusual, but refinancing your mortgage can be a reasonable way to reduce your mortgage interest rate. When you strategically plan your initial mortgage, you will get a lower interest rate, but to take maximum advantage of it, you can consider mortgage refinancing.

In refinancing, you replace your existing mortgage with a new one under new terms and conditions. This might involve a potentially lower interest rate. By taking advantage of a decrease in the accelerated mortgage payments since you obtained your initial mortgage, you can further decrease your monthly payments and save a huge amount over the life of the loan.

But, before you decide to refinance, carefully consider the upfront closing costs, which can be a lot. So, make sure the potential long-term savings from a lower interest rate outweigh these costs.

No. 4: Consider A Shorter Loan Term

When you want to lower your mortgage interest on your mortgage, you have to set the loan term accordingly. In fact, a long-term loan may seem tempting as it minimizes the monthly payments, but it increases the overall loan cost. So, know that a shorter loan term will come with a lower interest rate.

These short-term loans help you save on the total interest paid over the life of the loan. However, consider the trade-off, as this results in higher monthly payments. You have to consider a few things.

If you have a stable income and are comfortable with higher monthly payments, a shorter loan term can be advantageous due to the significant interest savings.

In short, carefully evaluate your budget and ensure you can comfortably take the higher monthly payments associated with a shorter loan term.

No. 5. Manage Debt and Lower Debt-to-Income Ratio (DTI)

Your DTI is an important metric that lenders use to assess your ability to manage debt and repay a mortgage. It essentially compares your total monthly debt payments to your gross monthly income.

A lower DTI indicates a stronger financial position and increases your take on securing a favourable mortgage interest rate.

Furthermore, when you have a lower DTI, the lender will see you as an attractive borrower. This will potentially open doors to better mortgage options and competitive interest rates.

This lower DTI will typically help you save money throughout the life of your loan.

How can you lower your DTI? Well, start by focusing on paying down existing high-interests, such as credit cards and personal loans. This will improve your overall debt burden but also add to lowering your DTI ratio.

Bonus Mortgage Points - Financial Management

The main thing that helps you get lower rates when buying a house on a mortgage is your financial management. That’s why you need to focus on the right finance management tools to save enough for your future or other aspects of life.

These tools include high-interest savings accounts (HISAs) that typically offer higher interest rates than traditional accounts on your savings. This means that the amount you have saved so far will get compounded over time to a higher value. This compounded savings will help you achieve your mortgage with a high down payment.

With a KOHO high-interest savings account, you earn 4x more interest than with Canada’s best banks1, earning up to 5% interest on your savings. Plus, interest is calculated daily and paid out monthly to maximize your earnings. Simply pick a plan, opt-in to Earn Interest, and start earning straight away with your KOHO account.

You can also use tools like KOHO’s free 30-day credit score checker to help you monitor your credit health. You’ll also receive helpful tips, articles, and insights into why your score might have changed. Plus, checking your score with KOHO won’t negatively impact it so that you can rest easy.

And if you want to build up your credit history before buying that dream home to get a lower rate on your mortgage, KOHO can help with that, too. We offer three ways to build up your credit. You can choose a KOHO line of credit, a secured line of credit, or both to supercharge your credit building. In fact, KOHO users see an average credit score increase of 22 points after just three months of using Credit Building2.

Final Thoughts

Coming to the conclusion that it is not impossible to get a lower mortgage interest rate in this inflation. If you intend to secure a favourable mortgage interest rate, you must start with strategic planning and know how interest rates affect mortgages.

These five ways help you improve your chances of achieving a lower interest rate and enjoying a good amount of savings over the life of your loan.

When you take proactive steps towards financial responsibility today, you help yourself towards a brighter financial future tomorrow.