If you're looking to qualify for a mortgage in Canada, you can now take advantage of a lower benchmark qualifying rate for mortgages. The Bank of Canada recently announced that the five-year benchmark has dropped to to 5.19 percent. hat's a 0.15 percent drop from its previous rate of 5.43 percent. The great news is that homebuyers may be able afford to borrow more for their future homes and that Canadians could qualify for a mortgage more easily.
The Significance of a Lower Home Mortgage Qualifying Rate
Since banks use a benchmark rate to qualify you for a home mortgage, it's important to pay attention to the figure. It’s also worth noting that the last time the Bank of Canada dropped this benchmark rate was in 2016. The rate had been on the rise since then.
Is the Qualifying Rate the Same as the Stress Test?
The short answer is, “kind of”.
Before 2018, the government required banks to apply an affordability test or the "stress test" known as Guideline B-20 to Canadians who had an insured mortgage or who did not apply a 20 percent down payment to their home purchase. This test helped banks better determine the likelihood of mortgage-seeking homebuyers paying them back. However, Canada made the stress test applicable to all homebuyers beginning in 2018.
Guideline B-20 made it more challenging for Canadians to borrow higher amounts. Officials believed the implementation of the stress test achieved its goal of lowering home prices, according to a report from TD Bank. The rules require you to demonstrate your ability to pay a mortgage at an interest rate at least two percentage points higher than the Bank of Canada's posted rate.
Because the qualifying rate has dropped, the stress test just got easier.
Expect More Buying Power
With a lower qualification rate, you can typically expect to get access to borrow more money. But it's worth understanding how Bank of Canada calculates the rate. The Bank of Canada uses the country's largest banks' five-year fixed rates as a baseline for the qualifying rate.
Commercial banks have been offering customers lower fixed rates over the years thanks to falling bond yields. The impact of these lower rates means you can expect to borrow $4,000 more on a $50,000 annual salary with a 20 percent down payment.
Evaluate Your Situation and Borrow What You Need
Even with access to borrowing more money, it's important to only take out a loan for what you need. This strategy helps you keep your debt down. Remember that your bank is only considering how much you make, your ability to pay and the money you owe when it's deciding on how much to lend you, not your personal commitments, such as a family vacation or your child's college expenses.
So, it's important to perform your own "stress test" consider your financial situation and think about your needs. Use online tools like mortgage calculators to help you figure out what you can and can't afford.
By taking these steps, you can determine how much you can afford and find the ideal best mortgage rate for you and your family.