Mortgages with variable rates or fixed terms under five years typically require that you qualify at a higher rate (called the “benchmark qualifying rate”).
For instance, if you apply for a 2.25% five-year variable mortgage, lenders generally make you qualify at their posted 5-year rate (5.79% for example). “Qualify” means that you must prove you can afford a payment at that higher rate.
Qualifying rates are used to ensure borrowers can handle their payments if rates go up.
In practice, lenders use the qualifying rate to calculate your debt service ratios. Lenders want to ensure that your debt ratios are low enough to meet their guidelines.
Here are a few things to keep in mind:
- Your payments are generally based on the contract rate (i.e., the actual rate you are quoted and agreed to), not the qualifying rate.
- As of April 19, 2010, all insured variable and 1- to 4-year fixed mortgages over 80% loan-to-value must be qualified using the posted 5-year fixed rate, as published by the Bank of Canada every Thursday.
- The Bank of Canada surveys the six major banks’ posted 5-year fixed rates every Wednesdays and uses a mode average of those rates to set the official benchmark.
- Many lenders (like the major banks) also apply the Bank of Canada’s benchmark rate to uninsured mortgages (i.e., mortgages with a loan-to-value of 80% or less).
- Some lenders (including many credit unions) allow lower qualifying rates if the loan-to-value is 80% or less. For instance, they might use a 3-year discounted fixed rate instead of the posted 5-year fixed rate.