By Nick Holloway

Following an announcement by the Bank of Canada, the Mortgage Qualification Rate (MQR) will be reduced by 0.15% from 5.34% to 5.19%, or 2% above contract mortgage rate (whichever is greater). This is the first reduction we have seen in the MQR since it was last increased in May 2018.

To provide a brief recap, the MQR was introduced as part of the B20 guidelines with the express intention of diminishing the amount home buyers can qualify for in respect of mortgage financing. This was initially rolled out for “high ratio” mortgages (down payments less than 20%) effective from October 17, 2016, and later revised to include “conventional” mortgages (down payment more than 20%) effective from January 1, 2018. The net effect of these changes for all federally licenced lenders was widely reported to reduce purchasers buying abilities by approximately 20%, in comparison with previous qualification rates - which would have been based on the mortgage contract rate at the time of securing the borrowers mortgage commitment.

How is the Mortgage Qualification Rate calculated?

The Bank of Canada release the benchmark posted 5-year rate every Wednesday, which is based on the mode average of the “big 6 (chartered) banks” posted 5-year fixed mortgage rates. Whilst the mode average is currently split equally at 5.19% and 5.34% respectively, the Bank of Canada took a view on the overall asset changes in aggregate and determined the 5.19% was a more appropriate rate to prevail.

Why does it seem the chartered banks are permitted to determine the mortgage qualification rates?

This is an interesting question as to why the regulators decided to use these rates to determine a qualification benchmark at the outset of setting the new mortgage rules. First we should look to understand the reasons why the chartered banks require a 5-year posted rate in the first place, when the reality of what most borrowers receive by way of a closed 5-year fixed mortgage rate is generally far lower than the comparable 5-year posted mortgage rate. We should consider that often the first time a borrower is likely to see their chartered bank's posted rate is when they find they need to break their closed fixed rate term mortgage early for whatever reason. The borrower is then required to pay a pre-payment penalty based on an Interest Rate Differential (IRD) calculation, which is generally not calculated from the borrower's actual mortgage rate, but the elevated posted rate (or using the discount received from the bank's posted rate) which typically has the effect of amplifying the penalty the borrower must bear in favour of the chartered bank.

What is the effect of a 0.15% reduction in MQR for mortgage qualification?

For borrowers who find themselves at the limit of qualifying, this will increase the amount they can qualify for. In the same way that the 2% increase in mortgage qualification mentioned earlier had the net effect of reducing a borrowers purchasing power by around 20%, here we can apply the same logic in reverse. A reduction in the MQR of 0.15% translates to an increase of a borrowers purchasing power of 1.5% - in other words, home buyers can qualify for around 1.5% more property. However, it poses the question whether this goes far enough considering we have recently seen far greater decreases in rates offered on fixed term mortgages, which have not been reflected equally in the chartered bank's posted rates.

Nevertheless, a small victory is a victory after all.