May 17, 2011

Qualifying Mortgage Rate and how it affects the home you can afford

By RateHub.ca

Mortgage lenders will use many factors to determine your loan eligibility. They take into account your annual income, debt obligations, living and utility costs, in addition to the mortgage you have selected. This includes the mortgage interest rate and the amortization period.

To protect themselves against the risk of you defaulting on your debt, lenders need to determine what you can reasonably afford. They will use what is called a ‘Qualifying Rate’, which is essentially an interest rate benchmark. This rate was legislated by the government to ensure Canadians who apply for a mortgage will be able to afford the debt they carry, with a buffer calculated for rate increases.

The Qualifying Rate is based on 5-year fixed mortgage rates. It applies to anyone pursuing a variable rate or a mortgage term less than five years. The government requires all persons to “qualify” for a 5-year fixed mortgage to ensure the borrower will be able to pay their mortgage in the face of rising interest rates.

Currently, the Bank of Canada has set the Qualifying Rate at 5.69%. Keep in mind that the rate is actually much higher than your typical 5-year fixed rate, as the Qualifying Rate is based on ‘posted’ mortgage rates as opposed to discounted rates, or rates actually achieved by borrowers following concessions and negotiations. For example, the lowest 5-year rate on RateHub.ca is 3.94% in Ontario.

The Qualifying Rate is no longer applicable at the 5-year mark on fixed mortgages. So, you will likely need to opt for a 5-year fixed rate if you wish to reach your maximum affordability. [2]

It’s important to note that the Qualifying Rate is only used to calculate your affordability; it does not reflect your actual mortgage payment. You will still pay the rate of the particular mortgage you applied for. For example, say you were interested in a 3-year fixed rate; using the table below, the lender would evaluate what you can afford based on 5.69%, but your monthly mortgage payments would be calculated using 3.35% interest.

The chart below illustrates when a lender would use the Qualifying Rate, and the corresponding market interest rate applied to your mortgage payments.

Mortgage Type and Term	Type of Rate Used	Mortgage Rate Needed to Qualify	Current Market Rates (Ontario)
FIXED MORTGAGE
1 year	Qualifying	5.69%	2.64%
3 year	Qualifying	5.69%	3.35%
5 year	Current	3.94%	3.94%
10 year	Current	4.84%	4.84%
VARIABLE MORTGAGE
1 year	Qualifying	5.69%	2.6%
3 year	Qualifying	5.69%	2.1%
5 year	Qualifying	5.69%	2.1%

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[1] The Qualifying Rate is set by the Bank of Canada every Wednesday. If you want to access the current Qualifying Rate and/or look at historical values, you can pull the v121764 data set from the following page http://www.bankofcanada.ca/en/rates/interest-look.html

[2] Assumes interest rate will limit affordability. Down payment can, however, limit affordability as it must be a minimum of 5% in Canada.

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This article was provided by RateHub.ca, an independent, impartial mortgage rate comparison platform. We bring the most competitive mortgage rates to one place, so you can make informed and efficient decisions. We believe that finding the best mortgage rate should be straight-forward, and our website has been designed with that in mind. RateHub works with the top mortgage brokers and lenders in Canada to bring you the most competitive mortgage rates. We update our rates on a daily basis with accurate, real-time data. We also provide ongoing mortgage education and resources to assist you in your selection process.