Bank of Canada Qualifying Rate
The Bank of Canada qualifying rate is the rate lenders must use to qualify clients on all high ratio insured mortgages. Previously if you took a 5 year term or longer, you could use the discounted rate received rather than this qualifying rate. This rule was changed however in October, 2016. The new rate acts as a ‘stress test’ for borrowers to make sure they can afford their payments when rates eventually rise.
The Bank of Canada rate itself is set based on the average or typical 5 year posted rate among the big 6 banks. The rate is set weekly, and the difference between the qualifying rate and the fully discounted rate will vary depending on the market. Most observers are not a fan of using the banks posted rates, as these can be manipulated by the banks.
How the Bank of Canada Rate Affects Conventional Mortgages
If you have more than 20% down payment/equity, this qualifying rate does not really affect you. There is one small exception to this however and it affects a lot of borrowers. If your lender back end insures their mortgages, the new rules apply to their conventional business. A lot of mortgage companies that we use do in fact insure all of their loans regardless of loan to value. These companies now will have to qualify their clients with the Bank of Canada rate, and the other guidelines that apply to high ratio mortgages. Again, this is why the new mortgage rules were seen as a boon to the big banks, eliminating competition and raising costs for consumers.
This is All Great, But What Does it Actually Mean?
The bottom line is this, using the Bank of Canada qualifying rate versus the 5 year discounted rate, you qualify for approximately 20% less house. This is significant obviously and in many centers will make it very difficult for first time buyers. Having said that, with household debt at record high levels, some sort of stress test was likely needed to keep the market on steadier ground. We always recommend talking to a mortgage broker to explain all these policies. It’s too late to go back now, but we may be able to find other ways to get you into the home you want.