Variable-Rate Rulebooks Differ
RBC has an advantage that other big banks don’t.
Last we heard, RBC is the only Big 6 bank that still uses a 3-year fixed rate to qualify conventional, variable-rate borrowers.
The other five big banks use the higher Bank of Canada 5-year fixed qualifying rate. (This means they calculate your payment based on a 5-year posted rate for debt ratio analysis purposes.)
That’s unfortunate for those five banks because this rule disadvantage is costing them good-quality business. We’ve talked about it with several big brokers. By and large, they’ve moved some variable-rate business away from lenders who qualify conventional mortgages with a 5-year posted rate.
RBC loves it because variable-rate mortgage shoppers with slightly higher debt ratios have no other big bank choices. (Keep in mind, RBC’s risk is mitigated because its applicants are still well-qualified, have 20%+ equity, and 40-42% maximum total debt service ratios).
What does the above difference in rules actually mean in practice? Well, suppose you make $60,000 a year and have 20% down...
A 3-year fixed qualifying rate of 3.85% means you’ll be approved for a $291,000 variable-rate mortgage.*
A 5-year posted qualifying rate (5.99% currently) means you’ll be approved for only $231,000. That’s 21% less mortgage just because you chose a different bank.
RBC isn’t the only one benefiting from more liberal variable-rate qualification policies. Smaller lenders with similar guidelines are also enjoying a volume boost. Examples include ING Direct, Merix Financial, Street Capital and others. In fact, some would say the new qualification rules are one of the better things to happen to non-bank lenders in quite some time.
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* Assumes no non-mortgage debts, a 35-year amortization, and a conservative lender-imposed 32% gross debt service ratio.
