Effective April 19, all high-ratio insured mortgages that have a variable rate or a fixed term under five years will be qualified using the greater of:
the chartered bank 5-year posted rate (5.39% today), or
the contract rate.
There’s been a lot of speculation surrounding this change. The new qualifying rate has been a big question mark ever since the Finance Department announced its new mortgage rules on February 16.
The posted qualifying rate will be published by the Bank of Canada each Monday at approximately 12:01am Eastern Time. Here’s the link: Posted Mortgage Rate (Look for series V121764.)
Currently lenders use qualifying rates that range from discounted 3-year fixed rates (like 3.29% today) to posted 5-year fixed rates (5.39% today).
Going forward, mortgages with terms of five years or more will use the contract interest rate. This is key because it suggests lenders will still be able to qualify insured 5-year fixed borrowers using heavily discounted contract rates (e.g., 3.75% instead of 5.39%, as of today).
If so, guess which term is going to grow in popularity? Yes sir; the venerable 5-year fixed. It’ll be the easiest term to qualify for, for people with borderline debt ratios.
CAAMP estimates that 30% of home buyers choose a 1- to 4-year term. With this new qualifying rate, some of those people will be forced into a 5-year term (and a very small number will no longer qualify at all).
Keep in mind, these changes only apply to mortgages over 80% loan-to-value, says CMHC. So if you’re putting down 20% or more, you probably won’t be affected.
For mortgages with multiple terms (e.g., hybrid mortgages), each term will be qualified using the applicable criteria above.
Based on the recent inquiries we're seeing from concerned borrowers, there may be a rush to get applications in under the old rules.