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What is the Benchmark or Qualifying Rate? And What is The “Stress Test”?
November 8, 2021 | Posted by: Julie Stewart-Boyle
The 'mortgage stress test' is a term you may have heard – it means you have to qualify for your mortgage using the qualifying rate. Qualifying rates are used to ensure borrowers can manage their payments if rates go up when their mortgage reaches the end of its term.
“Qualify” means that you must prove you can afford a payment at that higher rate.
In practice, lenders use the qualifying rates to calculate your debt service ratios. Lenders want to ensure that your debt ratios are low enough to meet their guidelines.
Let’s breakdown the qualifying rates that lenders use. Whether your mortgage will be uninsured or insured (i.e., with CMHC insurance premium), you generally must qualify at a higher rate (called the “benchmark qualifying rate” or “the lender’s contract rate plus 2%”).
The minimum qualifying rate is based on either the benchmark rate of 5.25% (currently) OR the rate offered by your lender plus 2%; whichever is higher.
- So, if your lender offers a rate of 2.99%, you’ll have to use the 5.25% qualifying rate (the benchmark rate) in your stress test.
- If your lender offers a rate of 3.49%, you’ll have to qualify using a rate of 5.49% (the lender’s contract rate of 3.49% plus 2%) as this is the higher qualifying rate.
Here are a few things to keep in mind:
- Your payments are based on your actual contract rate (i.e., the mortgage rate you are quoted and agreed to), not the higher, qualifying rates.
- The benchmark qualifying rate is the posted 5-year fixed rate, as published by the Bank of Canada every Thursday. The Bank of Canada surveys the six major banks’ posted 5-year fixed rates every Wednesdays and uses a mode average of those rates to set the official benchmark.
- Some lenders (including many credit unions) allow lower qualifying rates if the loan-to-value (LTV) is 80% or less. (LTV of 80% means you have 20% equity in the property for a refinance, or are putting 20% downpayment on a purchase.) For instance, they might use a 3-year discounted fixed rate instead of the posted 5-year fixed rate.
For all your mortgage related questions, contact Julie Stewart-Boyle, 250-668-4420, email@example.com.
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