Article Courtesy of Michelle Lapierre, Mortage Broker with Mortgage Tailors
This is a heads up to buyers and the Realtors who assist them! A couple of weeks ago we got to see an unintended consequence of the mortgage rule changes that now require a stress test on insured mortgages. Buyers with less than 20% down need to qualify at the Bank of Canada Benchmark Rate, not the lower contract rate they are actually getting.
The stress test has been in effect since last October. But, two weeks ago the Bank of Canada Benchmark Rate moved up for the first time since these new rules rolled out, increasing from 4.64% to 4.84%. It left banks and other mortgage lenders scrambling as they realized that any pre-approved clients immediately had a drop in their maximum purchase price. It was a small change but for those shopping at their maximum it can be the difference between a lender approval or a decline.
Your Rate Can Be Held, the Bank Of Canada Benchmark Rate Cannot
The requirement for buyers to qualify at the Bank of Canada Benchmark Rate is triggered when a mortgage is submitted to the insurer for approval once they have an offer on a property. A buyer can hold their contract rate by doing a pre-approval with a lender, but this does not protect them if the Bank of Canada Benchmark Rate moves up. They will still have to qualify at the current Bank of Canada Benchmark Rate when they actually write an offer. If the Bank of Canada Benchmark Rate moves up while a pre-approved client is out shopping, their maximum mortgage amount will drop.
So How Do We Pre-Approve People Now?
Pre-approvals were never guaranteed. The have always been subject to lender and insurer approval when an offer was actually written. This just adds another variable that can impact that final mortgage approval.
My approach to pre-approvals is educating buyers on how a maximum purchase price is calculated and providing them with the assumptions that go into their maximum purchase calculation. When I pre-approve clients, they will be given a list of the variables or assumptions that go into their maximum purchase calculation. These include condo fees, property tax amount, the current Bank of Canada Benchmark Rate, and heating costs. These assumptions should be shared with the buyer's Realtor. If any of these variables change while they are out shopping, it is important for them to revisit their maximum purchase, particularly for those buying near their maximum.
What Should Buyers Do?
Buyers can prevent failed financing attempts by working with a mortgage broker or lender who will help you understand how mortgage qualification works and the variables that go into their approval. Once pre-approved and out shopping, remain in contact and if properties you are looking at no longer line up with the parameters when you first did your pre-approval, it is time to call your lender and confirm that you still meet qualification guidelines.
Buyers should also protect themselves by writing any offer on a property subject to satisfactory financing so you can confirm a lender and insurer will approve your mortgage before your deposit is on the line.
Where Does The Bank Of Canada Benchmark Rate Come From?
The Bank of Canada Benchmark Rate has become key in lending, but where does it come from? It is currently 4.84%. Each week the Bank of Canada polls the big banks in Canada on their current 5 year fixed posted mortgage rate. The Bank of Canada Qualifying Rate is the average of those numbers. As mortgage rates move up, so will the Bank of Canada Qualifying Rate. It is identified as the Conventional mortgage - 5-year on the Bank of Canadas Daily Digest: