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Lower Qualification Rates on Conventional Mortgages. A Trend?

The-Mortgage-FilesOne year after most banks started using posted rates to qualify conventional mortgages, we’re starting to see some loosening of those policies.

Three weeks ago, Scotiabank lowered its conventional qualifying interest rates, and last week FirstLine (a division of CIBC) did the same.

Lower qualification rates impact debt ratio calculations and make it easier for borrowers to qualify for variable and 1- to 4-year fixed mortgages.

Whereas big banks have been using posted 5-year fixed rates to qualify shorter-term conventional mortgages:

  • FirstLine/CIBC now uses:
    • The greater of the contract rate or the 3-year CIBC posted rate to qualify variable and 1- to 4-year fixed terms.
  • Scotia now uses:
    • The 3-year posted rate to qualify variable, 1- and 2-year fixed terms.
    • The contract rate to qualify fixed terms greater than two years.

The above changes apply to mortgages with 20% or more equity.

HELOC qualification rates have been reduced as well.

As we reported before, the nation’s biggest bank (RBC) has long used a 3-year posted rate to qualify conventional variables and 1- to 4-year fixed terms. With Scotia and CIBC joining in, some think it’s only a matter of time before the other banks follow.

For that matter, some expect big banks to eventually move back to 35-year amortizations (from 30) on low-ratio mortgages. ING Direct and Laurentian Bank have conventional 35-year amortizations now, and that will certainly prove advantageous to them.

Sidebar:  It’s important to note that none of these qualification rate changes affect high-ratio insured mortgages, which are backstopped by the federal government. High-ratio variable and 1- to 4-year fixed mortgages are still qualified at the big banks’ median posted 5-year fixed rate.

Rob McLister, CMT