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

  1. Merix Financial still has a 40 year am on conventional files, and they qualify at their 3 year fixed too. I saved my client a ton of money on a mortgage i just did with them.

  2. Great info. Rob, in what neighbourhood was your clients Beacon?
    thanks for the tip. Any basic details will help us slot clients accordingly – nothing private and thanks again

  3. My clients beacon was 640. Their min beacon is 600. They’re an A lender but they have been really good in helping me make deals work…

  4. Bankers are fooling a lot of stupid people, including politicians. Does anyone REALLY believe banks want to save customers interest on a mortgage?? Sure, you have guys like BMO CEO Bill Downe saying people should take shorter amortizations. Meanwhile BMO is selling interest only Readilines like crack to an addict. Jesus, even a 50 year amortization is better than interest only. Wake up people!!!!

  5. 35 & 40 yr mortgages are a such a bad idea, when these clients who just scrap into qualifying for these mortgages because of the longer terms,come to refinance in 5yrs when the payments will probably rise due to higher rates. They will have such a payment shock they are eventually going to default on some debt, which is typically credit card debt which has a very quick impact on their credit scores they so will either stay will their current lender & rate or have to refinance with a private lender because they cant handle the payment. Promoting longer AMs is not helping people in the long run

  6. @Jon
    That is a poor generalization IMO. It is the classic mistake of lumping all borrowers together and judging them the same. 35 and 40 year ams aren’t “bad” for everyone, only for people who use them to overborrow. For cautious homeowners, longer ams are simply tools that let them allocate cash flow to more important uses.

  7. Hello All:
    My husband and I are trying to decide wether or not to get back into homeownership after being renters for little more than a year. We have one debt 660 /month for a truck. Nothing else. Our Beacons are strong and CIBC’s internal credit scores place us at 85 out of 100.
    There are a couple of mitigating factors. I am on disability for the forseeable future (1700/mo) and my husband is a spender which is why we don’t have a large amount to put down on the house as a downpayment. Do we wait a year to save some $$ or jump in now while interest rates are low and prices are relatively low for our area (Hamilton,Ontario).
    Can anyone offer some guidance please? Thanks so much.

  8. Hi Elizabeth, my name is Michael Dorey, I am an agent with The Mortgage Centre Canada. I would like to assist you if possible, but this is not a proper forum in which to discuss your situation. If you would like to contact me for a no cost, no obligation assessment I would be happy to see if I can help you make an informed decision. I am including my contact information and you can get in touch with me in complete privacy.

  9. Hi, we are looking at moving from one house to another, and our lender (ScotiaBank) is claiming they can qualify us at their three year fixed rate (4.55%) for a variable rate mortgage with only 5 or 10% downpayment… We are also dealing with a mortgage broker, and they claim that this is incorrect, and that by law we must be qualified at the current Bank of Canada 5 year rate, which is currently 5.69%.
    Who’s right? Has this changed at all since this news article was written? From all the research I’ve done on-line, I get the impression that the mortgage broker is right, and that we will need to be qualified at 5.69%. Does anyone have a link to the official information that will back this up?
    We already have an accepted conditional offer on our house, and an accepted conditional offer on the house we would like to buy, and this information is key to determine if we should stay with our ScotiaBank representative, or deal with the mortgage broker.

  10. From CMHC site John it apeprars the broker is correct if you are buying with less than 20% equity. ***The qualifying interest rate used to assess borrower eligibility for loans with a LTV ratio greater than 80% is as follows: Fixed Rate (FR) Mortgages and Variable Rate (VR) Mortgages: For FR term of less than 5 years and for all VR mortgages, regardless of the term, the qualifying interest rate is the greater of the benchmark rate and the contract interest rate. For FR term of 5 years or more, the qualifying interest rate is the contract interest rate. Mortgages with Multiple Interest Rates (e.g. Multi-Component): Each component must be qualified using the applicable criteria defined above.
    Reference http://www.cmhc-schl.gc.ca/en/hoficlincl/moloin/hopr/hopr_001.cfm

  11. ScotiaBank is wrong and the broker is right.
    If you are putting less than 20% down with ScotiaBank they must insure your mortgage. The federal government requires that insured borrowers have the ability to make payments at the posted 5yr rate. That is 5.69% at the moment.

  12. It really depends on a lot of factors. First off, what price range of home are you looking into?
    If your mortgage & property taxes are going to be significantly higher than your current rental cost, then unless you have been comfortably saving that difference each month you shouldn’t buy right now. Also, if you aren’t putting a minimum of 5% down, you aren’t getting a good enough rate to justify getting a mortgage at the lower rates. While it is true that rates are increasing, taking a high rate in today’s market might not be better than taking a low rate available in 3 years.
    All that being said, it’s hard to say without knowing your intended purchase price, savings and income situations.

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