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The Mortgage Qualifying Rate, also known as the “Benchmark Rate” or “Stress Test” Rate, is currently causing havoc with the power of mortgage borrowing. The major issue is that the current Qualifying Rate sits at 5.25% where it has been for quite a period of time. The issue is that most 5 Year Fixed Rates are now over 5% so borrowers are now forced to qualify at the contract rate plus 2%. That means if your mortgage lender is charging you a 5-Tear Fixed Rate of 5.26%, you must qualify for the mortgage with a rate of 7.26%. This significantly cuts into what a borrower will be able to afford.

To counter-act this calculation, the variable rate is the way to go as currently those rates are coming under the Benchmark Rate of 5.25%. So, if you secure a variable at Prime Minus .75%, your contract rate today would be 2.95%, so the Benchmark of 5.25% could be used for qualifying. That, is a major change than the 7.26% we discussed above.

The con to the variable rate is that it is based on Prime so it is subject to change as the Bank of Canada continues to increase their Overnight Rate to battle inflation, so your mortgage rate will rise with the bumps in prime. This is the example of the craziness in Canadian Mortgage Financing at present. Will this change?

There is a good bet it will, and relatively soon. On July 13, 2022 the Bank of Canada will make their next Overnight Rate announcement where all seem confident, another rate bump will be supplied. The hope is that this fullish Benchmark Rate rationale will be adjusted to make more sense and put a stop to the lower borrowing power for borrowers have with a fixed rate mortgage.

As of today, borrowers will qualify for a larger mortgage if a variable rate is taken or a shorter fixed term. They may also qualify for a larger mortgage through other types of lenders than just their bank. Today’s mortgage world in Canada is more complex than ever and the best piece of advise one could be given is to connect with a good Mortgage Professional who is well educated in the field and can work with you to achieve the best mortgage channel to maximize the complexities of mortgage financing that exists. Its not about the lowest rate any longer, its about achieving the best available mortgage, with the lowest possible rate based on your circumstances.

Source: Canadian Mortgage Trends