Posted Is The New Qualifying Rate!

Mortgage-NewsEffective 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.

  1. Stick a fork in the real estate market. It’s done.
    These insane new rules, rising rates, and the HST guarantee that price appreciation is over after this spring’s buying season.
    If I had a house to sell I’d list it faster than a pedophiles name on the sex offenders list.

  2. YMMV, but I just went to the ING site and entered $100K for income, $100K downpayment, no other debts and $2100 for annual taxes.
    Using their 3 year fixed rate I got a maximum
    purchase price of $669K. With 5.4% as the “qualifying rate” that number went down to $544K. 35 year amortization.
    Guess if Canadians have been very conservative with their finances (as has been argued by some here), this won’t make a huge difference, but if people have been borrowing as much as they can, then this could put a damper on things in a hurry in markets like Vancouver.
    It will be funny if people really do dogpile into the market to qualify at the lower rate. If they waited until after April 19th, they could bid against people who are similarly hamstrung by the new rules.
    Interesting times, these….

  3. If someone is taking out a four year fixed they have to qualify for the five year posted. But if they are taking out a five year fixed they have to qualify for the five year contract rate? Doesn’t quite make sense. Thoughts?

  4. Hi Norm: We got word from some reputable sources. I suspect there will be an official announcement soon from the Finance Department or insurers.
    Hi Dignan: Yes, it’s a little counter-intuitive isn’t it?

  5. Anyone buying now is buying at the top of the market in history. The housing crash will be hard on those who bought in the last three years. Funny thing is I bought my home 6 years ago. Today my wife and I could never afford it. I feel sorry for people who are buying overvalued housing in Toronto.

  6. “will be hard on those who bought in the last three years”
    Let’s not forget those who recently pulled a boatload of equity out of their homes (to take advantage of the Home Renovation Tax Credit, say), can’t/won’t sell in the next six weeks and need to sell in the next few years. Could be dicey for some folks.

  7. George/Jen – ssshhhhhhhhhhhhh!!! You’re scaring off potential buyers!
    I think that this policy will really start to have an impact once rates rise a bit… not a lot of people can afford homes at today’s prices if the qualifying rate is say 7.5% (just 2% higher than today).
    For example, using the CMHC affordability calculator:
    Income = $8333/month ($100k/year)
    Property Taxes = $200/month ($2400/year)
    No other debts
    7.5% mortgage rate
    35 year amortization
    $25,000 Down Payment
    The MAXIMUM mortgage that this person with a 6-figure salary can qualify for is $370,312, which makes a $395k maximum house price.
    In Toronto, that means you would *almost* qualify to buy this:

  8. 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.
    Pay attention to the words GREATER OF. I think your conclusions are therefore misguiding.

  9. Clients currently qualifying at my best 3yr rate vs the BoC posted qualifying rate means their income needs to go up by 24% to get the same mtg. This move might all but eliminate choosing any term other than a 5yr fixed rate mtg (when we are talking Insured mtgs.) On the Flip side, the bank’s portfolio mix will certainly weigh heavier on 5yr fixed term mtgs making them more stable, predictable and valuable to investors. Will these efficiencies be passed on to the consumer? I wonder if the new IRD rules will impact early pay-out’s for those Insured clients wishing to take advantage of other terms once they have built up sufficient equity?
    Interesting times we lend in!

  10. Some folks are making a mountain out of mole hill here.
    Anyone putting 5% down on a purchase should by default be choosing a five year term,
    The only people getting a vrm should already have 20% down, or have more than enough income to support increased payments.
    Pretty straight forward.
    There won’t be a housing bust because of this rule!

  11. Rob,
    When CMHC went from 0 down/ 40 year amortization to 5/35 they honoured the lenders pre-approval letters with borrowers until they expired.
    Do you think ALL mortgages insured by CMHC after April 19 will have to conform to the new rules or will they allow buyers who were pre-qualified under the old rules to get the mortgage amount stipulated in their lender’s pre-approval letter?
    What are you hearing from lenders now. Are they setting loan limits for new clients based on the old or new rules?

  12. What people “should do” and what they “do” are two different things.
    A segment of our population thinks it’s a good idea to buy as much house as they can. They use variable, 1 year and 3 year mortgages to get under TDS limits.
    I think a lot of fringe buyers will be shut down by this rule.

  13. Right wrong or indifferent, when I look at my book of business, a large percentage of the Insured mtgs that are other than fixed 5yrs. It would be safe to assume a large percentage these people with less than 20% available for a D/P will now have to change their thought process. Just because a person is Insuring their mtg., doesn’t mean they are any less financially sophisticated than those having large amounts of equity.
    On another note, look at what happens to a large segment of our client base who through marital separations etc. ends up taking over, or porting and blending their existing mtg. They may not qualify under the 5.39% rule right now, but they can pay the Lender a penalty and then take a new 5yr fixed mtg. in order to qualify at a contracted rate that is 1.70% lower than the BoC qualifying rate for their current mtg… This change has more far reaching consequenses, and not just on those who should not be in short term low interest rate mtgs due to affordability reasons.
    This is just another change and I am sure there will be many more to come…

  14. Hi Roger,
    The Finance Department said: “Exceptions would be allowed after April 19 where they are needed to satisfy a binding purchase and sale, financing, or refinancing agreement entered into before April 19, 2010.”
    Regarding pre-approvals, I’ve heard from some lenders that the qualifying rate will be determined on the date the deal turns live (i.e. when the borrower has a firm purchase agreement).
    Don’t rely on that just yet though. I will try and get a definitive answer shortly.
    P.S. A reminder for good measure: The new qualifying rate doesn’t apply to all mortgages. CMHC says the new qualifying rate applies after April 19 only to high-ratio insured mortgages.

  15. Rob,
    Thanks for the reply. If I understand you correctly all the people that have already been pre-approved for a high ratio mortgage loan of maximum $xxx only have until April 19th to sign a firm purchase and sale agreement for this amount. After April 19th the size of the loan will be set according to the new rules. Am I correct in my interpretation or is the pre-approval letter considered a “bonding financing agreement” by the Finance Department?
    A number of buyers could be in for a big shock. For example, consider a pre-approval letter that was issued last month and expires at the end of May for a maximum loan of $xxx. The buyer signs a purchase and sale agreement on May 15th based on the maximum amount in the pre-approval letter. They do not put subject to financing in their offer thinking they are pre-approved. However, under the new rules they qualify for much less. They now have to break the deal and are liable for damages to the seller. Things could get nasty.. Comments?

  16. Hi Roger, There may be exceptions. We haven’t received any definitive guidance on pre-approvals yet. Will advise once I know.
    One thing I’ll say for sure: Pre-approvals are often not underwritten anymore. In many cases they are just rate holds. Unless you are certain the lender has reviewed and approved (or will approve) your income, debt ratios, credit, down payment, and the property, always insert a financing condition in your purchase agreement.

  17. A preapproval isn’t worth the paper its written on, and certainly is in no way a commitment to finance.
    In your case, the only liability will be on the part of the buyer who waived their financing condition.

  18. No one and I mean NO ONE should buy a house with out a condition of financing based on a pre-approval. “Amazad” said it best, A preapproval isn’t worth the paper its written on.
    Please people, you need an approval with all conditions in the approval met in order to be secured that you will receive the funding for your home.
    I can get a pre-approval for $2 million in a heartbeat even though my income only qualifies me for about $400,000.
    Rob, perhaps in the future a really good post on pre-apps would clarify things for your non-mortgage-industry followers.

  19. I think the new rules to qualify people make sense with the current rates and am glad to hear it will be a rate posted by the bank of Canada. Any mortgage broker or banker should be asking ANY client who is pushing the limits on their debt service what will happen if rates go up to 7% or more by the time they renew. The new rule will hurt a few people now but save a lot of other in the future. House prices went up largely due to the amount of easily accessed money at low rates for longer periods of time.
    What I really want to know is when the new IRD rules are going to come into effect and what they will be. I have several clients who need to refinance and I am hesitant to tell them to go ahead until I know if the changes will affect existing mortgages or if after a certain date all mortgages will have to have the same IRD calculation.

  20. Not a mortgage expert here, but a curious “prospect”, who likes to stay informed. If I read this correctly, then there really is no change for folks who have their ducks in a row.
    I will still get approved based on the 5 year discounted rate that is offered by, say, ING.
    Only if I am looking for a variable mortgage, will I be approved based on the 5 year rate as posted by the BoC.
    If that’s the case, I don’t really see how this will cause an issue in less-overheated markets like Calgary.

  21. It depends what you mean by “ducks in a row.”
    If you mean 20% down and 30% debt ratios then ya, you’re golden.
    If you’re like the rest of us without perfectly alligned ducks, then this is a big deal. It means a lot of people won’t be able to get variables, 1yr, 2yr, 3yr, and 4yr mortgages.
    On the other hand I agree that it probably won’t hurt home prices long term.

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