September 14, 2017

How Will a Higher Mortgage Qualifying Rate Affect You?

Canada’s economy appears to be back on track after years of stop-start recoveries and anemic growth. That’s welcome news for sure, but for one segment of the population, an increased GDP may indirectly leave them even more out of pocket.

On July 12, prospective home buyers woke up to the news that the Bank of Canada had increased its key interest rate for the first time in seven years. That in turn has led to Canada’s big banks increasing their Prime borrowing rates – and, as a result, the mortgage qualifying rate.

What is the Mortgage Qualifying Rate?

The mortgage qualifying rate, (which has increased from 4.64 to 4.84 per cent) requires all borrowers paying less than 20 per cent down to qualify at that level, even if they can get a cheaper contract mortgage rate. It is a benchmark set by an average of the fixed posted rates from the big five banks.

For example, consider a scenario where a couple is looking to calculate their maximum affordability before starting their home search. Let’s assume they both have no debt, a pre-tax total income of $120,000, and have saved $35,000 for a down payment, and estimate property taxes and heating costs will be $475 per month.

If this couple didn’t have to use the qualifying rate, they’d be able to purchase a property priced at $600,000 with a fixed five-year rate of 2.64%. Using the qualifying rate of 4.84%, however, their maximum affordability declines to $578,269 – that’s a difference of $21,731. (These calculations were made using RateHub’s mortgage affordability calculator.)

Should borrowing costs rise, this could prove to be a double-whammy for already stretched buyers – and the likelihood is high there are more rate hikes to come.

Related Read: Why You Need a Pre-Approval When Interest Rates Rise

Will Rates Rise Again?

Mike Bricknell, mortgage broker at Canwise Financial, has worked with a variety of lenders during his 10 years in the industry, from large financial institutions to smaller banks and credit unions. He says the one thing that never changed was rate pricing barely rose above the zero mark. This summer saw the trend shift, though – and although the BoC’s hike from 0.5 to 0.75 per cent doesn’t look that significant on the surface, it will certainly impact already stretched borrowers.

“We were forewarned that rates would increase, and now they are here,” Bricknell says, adding, “Something I felt slid under the radar at the time was the Bank of Canada raising the qualifying rate. I don’t think a lot of people noticed that for at least a week after the rate change.”

It is widely predicted that the Bank of Canada will indeed raise its key rate later this year, which is why gaining pre-approval for a lender now at a lower rate could save people a lot of money down the line, as Bricknell outlines.

“We are trying to push people to buy in now,” he says. “Nobody knows for sure what the upcoming regulations will be. Will it be even harsher to become qualified to buy? My parents were paying interest rates of 20 per cent in the ‘80’s. Who knows what the future holds, so I think now is a good time to buy.”

Double Digits Highly Unlikely

However, after a decade of ultra-low rates – a monetary policy still in place in much of the world – the chances of a return to double-digit rates looks highly unlikely. Many economists pin the blame for rampant house-price inflation on central banks, saying they’ve made borrowing too appealing. In Bricknell’s opinion there is another root cause, and one that remains no matter what the Bank of Canada decides on rates.

“We have seen the amount of sales decrease by about 40 per cent, but prices haven’t really gone down,” he says. “There are a large amount of people all over the world that want to come to Canada, so I think house prices might dwindle a little bit with higher rates, but only in certain markets. It is the price of land that is driving up home prices.”