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Shut Out From Variable-Rate Mortgages

Declined-Variable-Rate-Mortgage Only 5% of new high-ratio mortgages have had variable rates, versus 15% six months ago.*

People are avoiding variables not just for fear of rising rates, but because many no longer qualify.

This was not to be unexpected (see: The 5-Year Funnel). Up until April 18, a variable-rate mortgage required you to prove you could afford payments based on a 3-year discounted rate (e.g., 3.75%).

Now, the government requires variable-rate applicants to prove they can afford payments at the Big 5 banks’ posted qualifying rate (6.10% today). That makes it distinctly harder to keep your debt ratios within lender limits.

The kicker is that you can’t change lenders at renewal without requalifying. Therefore, if you don’t have 20% equity at maturity you could be stuck in another 5-year fixed mortgage (possibly at your existing lender’s “rack rate”). If you instead want to switch to a variable or 1-4 year fixed term, your debt ratios will have to fit under the much stricter government guidelines at that time.

Of course, those guidelines will get tougher if fixed rates rise.

Today’s 6.10% qualifying rate is 435 basis points above what most borrowers are getting on new variable-rate mortgages. However, in years prior, most lenders considered 150-200 bps a reasonable number.

This is all pertinent because, as experts agree, variable and short-term mortgages are often the best way to keep lender’s hands out of Canadians’ pockets. With many financially stable Canadians now being unable to choose variable/short terms, lenders will get richer and many borrowers will get poorer.

It’s therefore somewhat intriguing that the federal government chose the posted 5-year fixed rate for its new qualifying rate. We heard they were also considering a spread above prime (like prime + 3%).

It makes one curious about the logic that went into the final decision. Is there a real threat of sustained 4.35%+ higher rates?  Or did the powers that be set the bar overly high to herd people into 5-year fixed mortgages—which just happen to be more profitable?

Maybe the latter is just too cynical a thought…


(* Source: Genworth Financial Canada’s Peter Vukanovich, as quoted in the The Gazette; Reporter: Garry Marr)