Mortgage Qualifying Rate

Definition: A pre-determined interest rate that the lender may use to determine the maximum mortgage amount you qualify for when requesting a variable rate mortgage or terms less than 5 years. It is often NOT the actual low interest rate you see advertised or indeed what you might end up paying.

Confused? So you have been on-line and thrown some numbers into a mortgage calculator and it has told you how much you qualify for and therefore your maximum purchase price of a new home. But then you find out that you don’t actually qualify for as much as you thought because of what is called a “qualifying rate” or “benchmark rate”. Read on for more clarification and how it applies to you.

What is the Qualifying Rate? The qualifying rate differs depending on the amount of your down payment, the type of mortgage and the length of the mortgage term. See our Mortgage Smart Tips on Mortgage Type and Mortgage Term for more information. The qualifying rate is based on what is known as the “benchmark interest rate” that is set by the Bank of Canada every Wednesday based on the bond market performance. This rate is much higher than current rates and as of March 3^rd, 2014 it was 5.24%. Remember that this is NOT the actual rate you will pay, just what has to be used to make sure the mortgage is affordable to you if it applies to you.

Why do you need to be qualified at a higher rate? Interest rates are still at historical lows and when the lender reviews your application they want to ensure that you can not only afford to pay the mortgage today, but that you can handle future rises in interest rates when your mortgage is up for renewal in the coming years.   The last thing anyone wants is to risk you losing your home when your mortgage is up for renewal and there is a jump in rates and you can no longer afford it. This mandatory “qualifying rate” requirement came into effect back in 2012 in Canada in order to avoid the foreclosures that we saw south of the border in 2007 to 2010, where rising interest rates meant thousands lost their homes and a housing market crash ensued.

When does this apply to you? I mentioned earlier that there is certain criteria when this may affect you and how much you qualify for. Below is a guideline and if any of these apply, could result in you needing to qualify using this higher rate:

1. Amount of your Down Payment: If you have less than 20% down payment and applying for a variable rate mortgage OR a mortgage term of less than 5 years
2. Type of Mortgage: No matter your down payment amount, if you are looking for a variable rate mortgage, you will need to qualify using the qualifying rate.
3. Length of the Mortgage Term: If the mortgage term is less than 5 years so from 6 months to 4 years.

When does the qualifying rate not apply? If you select a five year fixed term mortgage or longer, then you can qualify using the actual interest rate you will be paying and we don’t have to use the higher qualifying rate. This often results in you qualifying for a bigger mortgage but of course limits your options for mortgage terms.

So how do you figure out what applies to you? Let me determine the maximum you qualify for with the different mortgage terms and products. I can provide you with options on both the maximum you qualify for using a 5 year fixed term and also the maximum using the qualifying rate. Remember, the latter means you can then select from 1 to 4 year fixed terms as well as the popular variable rate mortgages.

How do I qualify for more? So it is possible that using the qualifying rate results in you not being qualified to purchase the home at the price range you need or want? If the answer is yes, then in order to maximize how much you qualify for, you can select a 5 year fixed term or longer.

Barb Pinsent Mortgage Broker

Ph: 780.370.1490

http://www.barbpinsent.com