21 Feb 2020

0 Comments

by

New Qualifying Rate Effective April 6, 2020

Before I get into it allow me to say that I LOVE the great publicity as a result of this change. We needed some good news for consumers and we got it.

Without further ado…

A new Benchmark Rate for insured mortgages will replace the Bank of Canada 5-Year Benchmark Posted Rate in determining the minimum qualifying rate (stress test).

The new Benchmark Rate will be:

  • The weekly median 5-year fixed insured mortgage rate as calculated by the Bank of Canada from federally-backed mortgage insurance applications adjudicated by mortgage insurers; plus
  • A buffer of 200 basis points to be set by the Minister of Finance upon the coming into force.
  • The Benchmark Rate will be published on a Wednesday and come into effect the following Monday.

The new Benchmark Rate used to determine the minimum qualifying rate for insured mortgages will come into force on April 6, 2020.
The minimum qualifying rate for insured mortgages will now be the greater of:

  • The borrower’s contract rate, which is the mortgage interest rate agreed to by the lending institution and the borrower; or
  • The new Benchmark Rate.

The new Benchmark Rate will be more responsive to market conditions by tracking the actual mortgage rates offered by lenders at the application stage. These rates have been shown to be consistent with final mortgage contract rates. Using the application data allows for more timely data to be published.

The Minister of Finance will have the authority to adjust the buffer.
The new Benchmark Rate for insured mortgages will be published weekly on the Bank of Canada’s website, and will be based on submitted mortgage insurance application contract rates.

The new Benchmark Rate for insured mortgages will be published at two decimal places. If, on any given week, there are any delays in updating the new Benchmark Rate, the previous week’s published Rate will stand until a new Rate is published.

Great…so what does this really mean?
 
Great question…let’s break this down!
 
The Department of Finance (DOF) is using an example of 2.89% (today’s average 5-year fixed) + 2% = 4.89% would be the new qualifying rate. Now I am hearing some brokers say, this is awesome because rates are 2.69% + the 2% gives me a lower qualifying rate of 4.69%. I would agree, that is awesome but that isn’t likely to happen, hence why the DOF has asked for a average 5-year rate…not the lowest.
 
In the case of a 4.89% qualifying rate, down from 5.19% today, this would allow someone with $80,000 annual income to qualify for an extra $15,000 in purchase price. In this case, that is an additional 3.4% in purchase power. Not much but every little bit helps.
 
What are my thoughts?
 
So glad you asked!  LOL
 
I like it, but not a lot (parents of toddlers will appreciate me borrowing this saying from Despicable Me, hehe).
 
What I mean is that given today’s bond yields, the Benchmark Rate should be around 4.64% but it is stuck at 5.19% (I won’t get into the politics of this here today). Even if it drops to 4.89%, it is still higher than it should be if the Bank of Canada didn’t rely on the big Banks Posted Rates.
 
I can understand the need to make this more dynamic, I love that. But… here is the BIG but. My concern with a NEW weekly Benchmark Rate, we could have a situation where a person qualifies this week but if the Benchmark Qualifying Rate jumps next week, that same person may not qualify. A more dynamic Benchmark will result in a more dynamic pre-approval, and this could be both good and not so good depending on the direction of the market at that time.
 
Personally, this change is better than no change at all and I’ll take it. The current Benchmark Rate was a bad idea from the onset, in my opinion. My preference would be to ban foreign ownership (just as Australia did) in the residential housing market, remove the stress test all together, allow the market to adjust and suddenly you have more affordable housing for all Canadians.

For more information and to better understand what this might mean for you, give our office a call at 403.242.5547. We can help.

Jeremy

Leave A Comment






© 2020 Canada Mortgage Direct. All Rights Reserved.
Powered by TechWyse
TechWyse-logo