What is the qualifying rate?
As you probably know, there have been many mortgage rule changes over the last few years. Chances are, these rule changes affect you, whether you’re an existing homeowner or first-time home buyer. One of the things that has been talked about a lot is the mortgage qualifying rate.
You need to prove you can afford your mortgage payments
Lenders now have to look at whether you can handle payments at an artificially high rate. It’s known as the mortgage qualifying rate, or the stress test rate. That rate will vary. It depends on whether your mortgage is a high ratio mortgage – your down payment is less than 20% of the purchase price – or conventional – your down payment is 20% down or more. Bottom line: the stress test rate will be higher than the rate of your actual mortgage. Your actual payments are calculated using the actual mortgage contract rate.
Qualifying rate for high ratio mortgages
This rule has been around since 2010. The high-ratio qualifying rate is a 5-year rate published every week by the Bank of Canada. The Bank surveys the six major banks’ posted 5-year rates every Wednesday, and calculates the “mode average” of those rates to set the official benchmark rate. This is the rate your mortgage lender must use to calculate whether you qualify for a high ratio mortgage. [Click here for tips on how to qualify for a mortgage.]
Qualifying rate for conventional mortgages
The latest “stress test” or qualifying rate for conventional mortgages went into effect January 1, 2018. Federally regulated lenders have to use this stress test to qualify all new conventional mortgages. It’s either the benchmark rate (described above), or your actual mortgage rate plus 2%, whichever is higher.
Why is the stress test rate different?
These rules were implemented by two different government bodies. The high ratio stress test rate was set up by Canada’s Department of Finance, while the conventional one was introduced by the Office of the Superintendent of Financial Institutions. We can’t figure out the logic behind this either!
Can you still get into your dream home?
While mortgages have become more complex, this doesn’t mean that Canadians can’t get into their dream homes, consolidate debt, take out equity, or buy a second property. It just means that if you have an upcoming new mortgage need, we should discuss your plans as early as possible. We have access to lenders that aren’t federally regulated. We can suggest strategies to improve your credit and ensure you are in the best situation possible when you need financing. Please get in touch at any time. We are here to help you!
