There is no shortage of information floating around on how this may or may not impact you or your friends and family, so I feel that it’s very important today to shed some light on what this all means.
If you prefer to listen to my latest radio interview on the topic, here it is!
The easiest and most effective way to share the information with you can best be summed up in a recent conversation I had with one of my past clients who had some questions about how this recent qualifying rate increase would affect her plans moving forward. I hope you enjoy my little client Q+A!
Without further adieu, here is the conversation:
- Question: What is all of this hype about this week about a rate hike? Is this actually a hike in the rates I am paying on my mortgage?
- Answer: No, this is a qualifying rate, it’s different than the ‘actual’ rate you pay on your mortgage. If you are in a current mortgage, nothing has changed. This mostly impacts you if you are house hunting as essentially you are now qualifying for a smaller mortgage. Even with your income type and earning power the same, the qualifying rate means that you will technically qualify for less. Ie. Let’s say you qualified before the benchmark rate change for a $400,000 mortgage based on your current situation… the new change might mean that without any change in your financial situation, you actually qualify for less. This poses a challenge to those looking to buy because prices don’t tend to match what people are qualifying for in our competitive market.
- Question: Benchmark rate… for someone that doesn’t understand what this is, can you sum it up? How is it used?
- Answer: Benchmark rate is a rate set by the bank of Canada that is the minimum qualifying rate for lenders or any insured mortgages or if the borrower is getting a variable term. Essentially, they are saying that if you can qualify at the higher rate, we will grant you the mortgage at the actual rate. It can seem a bit confusing, but it’s basically a qualifying trigger. This doesn’t mean that’s the rate you actually pay on your mortgage. If you qualify with the higher rate, then your mortgage will be granted to you at the ‘actual’ rate. The new stress test introduced in January has ALL mortgages with federally regulated financial institutions qualify at the higher of either the benchmark rate or contract rate + 2%. For example, if you are looking at getting a fixed-rate mortgage, and the rate is 3.44%, your qualifying rate would be 5.44% (3.44 + 2) as it is higher than the benchmark rate. Now lets say you are getting a variable-rate mortgage, and the rate is 2.5%… you have to qualify at the benchmark rate (2.5 + 2= 4.5 –> so the benchmark is higher). There is a bit of an advantage at times to opting for a credit union as your mortgage lender because they only use the benchmark rate for insured mortgages.
- Question: As the qualifying rate increases, what does this do to people looking to purchase?
- Answer: This is the tough one for most people… It can be frustrating as they could be in the middle of negotiations (purchasing a new home) and within a week they qualify for less because they have to qualify at a higher rate that doesn’t reflect the ACTUAL rate they will be paying on their mortgage. In a case like this, they would either have to put more money down if it’s an option, or look at a lower price point. For some people that means putting things on hold which can be quite discouraging. However, this is all the more reason to get a solid pre-approval so you know you are shopping in the right price-point for your new home.
- What about people already in the market that are renewing… does it affect them?
- Answer: This without a doubt is the most frustrating thing with the new stress test… IF they are staying with their current lender, they don’t have to qualify under the existing rules and can just renew with whatever their lender is offering to them. We all know that this is not always in the best interest of the consumer as the lender might know you are essentially ‘stuck’! If they want to move their business out, ie. to a new lender who could potentially offer better terms or rate, then they must qualify using the new guidelines. For a lot of people that means they are stuck thanks to the new rules. Ouch right?! Obviously, in this case if you are stuck and can’t qualify to move your mortgage elsewhere, this benefits the lender, and not you!
- Question: What should you do if you have questions about your current situation?
- Answer: With any change, speak with your mortgage broker and make sure that you still qualify for the amount you thought you did if you are house shopping. I usually tell clients to send me their perspective homes if it’s on the high end of their budget to make sure ratios work before writing an offer. I can make sure you are writing competitive offers that suit what you actually qualify for, avoiding a ton of stress for you!