The Minimum Qualifying Rate (MQR) is an interest rate set by the Office of the Superintendent of Financial Institutions (OSFI) to assess a borrower’s ability to repay their mortgage. It is used by lenders to ensure that borrowers can handle higher interest rates in the future and to reduce the risk of over-leveraging.
OSFI, Canada’s financial regulator, introduced the MQR to help protect the stability of the housing market and reduce the risk of defaults, especially in a rising-rate environment. The MQR is typically set higher than the actual mortgage rate and is applied when qualifying for uninsured mortgages.
Why is the MQR important?
The MQR serves as a safeguard to ensure borrowers can afford their mortgage even if interest rates increase. It helps lenders assess whether borrowers will still be able to meet their mortgage payments if rates rise over the term of their loan.
The rule is designed to avoid the risk of borrowers being unable to pay their loans, which could lead to defaults and negatively affect the housing market.
How does the MQR work?
When a borrower applies for an uninsured mortgage, lenders use the MQR to calculate whether the borrower can afford the loan. The borrower must qualify at the MQR or the actual mortgage rate, whichever is higher. This means that if the actual mortgage rate is lower than the MQR, the lender must use the MQR to determine the borrower’s affordability.
For example, if a borrower’s mortgage rate is 2.5%, but the MQR is 5.0%, the lender will assess the borrower’s ability to pay based on the 5.0% rate. This ensures that borrowers aren’t stretching their finances too thin by qualifying at a rate that’s lower than the potential rate they might face in the future.
History of OSFI and the MQR
OSFI has played a critical role in setting and adjusting the MQR since its introduction. Here’s a brief look at the key milestones in the history of the MQR and OSFI’s involvement:
2008 – The Financial Crisis and the introduction of the MQR
In response to the global financial crisis, OSFI introduced the MQR as part of its efforts to maintain financial stability in Canada. The MQR was initially implemented as a tool to address concerns about the rising levels of household debt and housing affordability in Canada. The measure was aimed at ensuring borrowers could still afford their mortgages if interest rates rose sharply.
2016 – The stress test and the MQR
In 2016, OSFI introduced a stress test for all uninsured mortgages, which included the MQR. This stress test required borrowers to qualify based on the higher of the MQR or their contracted mortgage rate, with the goal of ensuring they could handle potential rate increases. The MQR was adjusted periodically to reflect changes in economic conditions and interest rate trends.
2024 – Changes to the MQR
In 2024, OSFI announced a significant change to the MQR. As of November 21, 2024, the MQR will no longer apply to straight switches of uninsured mortgages. Borrowers switching their mortgage to a new lender will no longer have to qualify at the higher MQR rate, which is expected to provide more flexibility in the mortgage market. However, the MQR will still apply to new mortgage applications and other refinancing scenarios.
This change is seen as a response to concerns over housing affordability, as it makes it easier for homeowners to switch to a better rate without having to qualify at a higher, potentially unaffordable rate.
Impact of the MQR on the housing market
The MQR has had a significant impact on Canada’s housing market, especially in terms of affordability and lending practices:
- Affordability constraints: For many borrowers, especially first-time homebuyers, the MQR has served as a barrier to qualifying for a mortgage. Even if their actual mortgage rate is lower than the MQR, the higher qualification rate may have made it harder to qualify for a loan, leading to affordability challenges.
- Market stability: The MQR has helped maintain stability in Canada’s housing market by ensuring that borrowers do not overextend themselves financially. By using a higher qualification rate, lenders have been able to mitigate the risk of defaults, especially during periods of rising interest rates.
- Lender flexibility: With the upcoming change to the MQR in November 2024, there will be more flexibility for borrowers to switch their mortgage lenders without having to qualify at a higher rate. This will likely lead to increased competition among lenders, potentially driving down mortgage rates and benefiting borrowers.
Last modified: November 29, 2024
