The purpose of using a benchmark rate when qualifying for a mortgage is to ensure that one can still manage their mortgage payments if interest rates were to increase.
This Qualifying Benchmark Rate has now increased from 4.64% to 4.84%
Benchmark rates, in the long run, will help to create stability in the mortgage market in Canada while making sure that there is not a bubble that is created in the meantime. Although mortgage rates in Canada are still very low, it is a mistake to borrow more money than you can comfortably repay, and due to that reasoning the benchmark rate has been introduced to keep the Canadian housing market in check.
Who decides what this rate should be?
The Bank of Canada surveys the six major banks’ posted 5-year fixed rates every Wednesday and uses a mode average of those rates to set the official benchmark and is published by the Bank of Canada every Thursday.
Whats to come!...
At present, home buyers with less than a 20% down payment have been affected by the mortgage “stress test” rule that the government of Canada enforced last October. The “stress test” requires homebuyers putting less than 20% down payment have to qualify at the Qualifying Benchmark Rate, reducing buying power by approximately 20-30 percent.
Regulators are now proposing that EVERYONE applying for a mortgage will have to qualify at this Benchmark Rate, regardless of their down payment.
If the new mortgage “stress test” proposal is approved and in place this fall, here is how it could affect a home buyer who does not require default insurance. Today’s home buyers can qualify for an approximate mortgage amount of $455,000 based on a $70,000/year income, assuming no debts and using current interest rates. OSFI’s new guideline would decrease this amount by approximately eighteen percent, meaning the maximum mortgage would drop over $80,000 and lower the maximum mortgage amount to approximately $375,000.
For many, it could become nearly impossible to refinance their existing homes and consolidate high interest debt into a mortgage and still qualify.
If you are considering making a move or wanting to refinance your mortgage, call us today to start the process just in case the proposed mortgage rules come into effect.