When you’re in the market to buy a new home, you know you’re going to need to borrow money. There are many different types of mortgages to suit each purchaser’s situation, and a qualified mortgage broker can help. What you might not know is that before you can borrow the money for your dream home, you have to qualify for the loan. A Qualifying Rate helps with risk assessment and will determine if you’re able to borrow the amount needed. “What is a Qualifying Mortgage Rate?” you may be asking. Keep reading to find out.
What Is a Qualifying Mortgage Rate?
A qualifying mortgage rate is essentially a stress test. The purpose of this rate is to ensure a borrower can handle their mortgage payments if rates increase. A qualifying rate is used in a few different ways. For a traditional or conventional mortgage, with a minimum of 20% down, borrowers need to prove they can handle the payments with the qualifying rate of 5.34% or two percent higher than the mortgage rate they’re applying for — whichever is highest. If you’re going to be putting less than 20% down, and insurance will be required on your mortgage, you must prove that you can afford the qualifying rate. This may seem stressful, but with changing interest rates, it can be helpful to know that you’ll be able to afford this higher rate. A good mortgage broker will help you to secure the best mortgage rate possible.
How Is the Qualifying Rate Established?
The qualifying rate was previously 5.14%, however, as of January 2018, this rate has increased to 5.34%. This rate is decided on by looking at the Big Six banks in Canada and what their five-year mortgage rate is. TD increased their rates last year with the other five major banks in Canada following swiftly after. It was this change that ultimately meant the Bank Of Canada increased the Qualifying Rate for homeownership.
How Will It Affect Buyers?
Buyers may have to consider buying a cheaper property or holding off and saving up more. If a potential homeowner is considering buying and has done their calculations on an average mortgage rate of closer to 3.06%, they still have to qualify for the 5.34% rate. This higher rate could mean that they do not qualify for the amount needed for the home they are interested in. This does not mean that they have to pay a mortgage amount at this higher rate. Your actual mortgage payments will be based on the lower contract rate that your mortgage broker secures for you, not on the higher qualifying rate. The Qualifying Rate is used as a stress test to make sure new homeowners can manage the payments and debt that comes with homeownership. This higher rate could end up disqualifying some potential buyers from borrowing the amount needed for the home they want.
Interested in finding out where you stand with the new qualifying rate? Let’s run through a few scenarios together that are specific to your situation to give you a better idea of how the rate increase will affect you.