It has now been confirmed that the new qualifying rate, effective April 19, 2010, for all CMHC insured mortgages will be as follows:
- The greater of the chartered bank’s posted 5 year term rate or the contract rate.
This will apply to all variable rate mortgages and for fixed rate terms under 5 years.
We were all waiting to find out what the new qualifying rate would be ever since the Federal Finance Department announced changes back on February 16, 2010. See New Rules: Not as bad as speculated
As of today the qualifying rate would be 5.39%.
This is a significant setback to borrowers and to many non-bank lenders. For all borrowers this will mean that they will be qualifying for much less money post April 19 compared to now. To many non-bank lenders, who have been qualifying many of their applicants on discounted 3-year fixed rates currently for variable rate products, this will level the playing field with their bank competitors. It may have an impact on their bottom line as this current policy had given them edge in attracting would be borrowers who needed just a bit more money.
As an illustration on the impact, below is the amount a borrower can get using three different scenarios. In all of them I am using an income of $60,000 per annum, a 25 year amortization, the assumption of no other debts, a 32% GDSR and a figure of $2500 per annum for property tax and heat.
- One non-bank lender today is using 3.65% as a qualifying rate for their variable rate mortgages. $274,000
- Using today’s 5 year fixed discounted rate from many lenders of 3.79%. $270,000
- After April 19, 2010 assuming the qualifying rate is today’s bank posted 5 year rate of 5.39%. $230,000
A client in this example would be able to borrow $40,000 LESS on a variable rate product after April 19, 2010 compared to today.
Although this has only been announced by CMHC, I anticipate other insurers (Genworth, AIG) to follow this government set mandate as well.
If current mortgage volumes are any indication, we will see a continued surge in clients attempting to finalize their mortgages prior to the new rules implementation.
As always your comments and feedback are welcome.
