This past Sunday may have seen what Mark Carney is hoping will slow down the housing market – an increase in the qualifying rate. However, Toronto mortgage brokers say that with the current mortgage market environment, the small jump isn’t going to do much to deter buyers.
The qualifying rate should not be confused with the Bank of Canada’s overnight rate. While the overnight rate sets the tone and is a guideline for all mortgage products a lender offers, the qualifying rate applies only to those seeking a high-ratio mortgage. Not every borrower needs to meet the qualifying rate criteria, only those that are applying for a five-year term or less on their mortgage in Toronto or Canada. Experts have been calling for the qualifying rate to be raised by 50 bps or more. However on Sunday, they were raised only by 20 bps. This means that anyone applying for a mortgage with a term of one to four years must qualify at the rate of 5.44%.
Generally, once a homebuyer has qualified for the rate, their mortgage payments will be based on their contract and the rate they could obtain with their current income, debt levels, etc., and not the qualifying rate. This rate is simply there to make sure that people don’t take on more debt that they can afford and that they’ll be able to repay their mortgage easily once approved. But while the slight increase cause a slight “tapping of the brakes” in the housing market, it’s not likely that it’s going to come to a screeching halt – or even slow down.
According to one Toronto mortgage broker, “The rate increase doesn’t mean much because borrowers are largely focused on fixed mortgages and the rates on a five-year fixed are so low that they’re going there and they’re not affected by the new qualifying rate.” Generally, brokers and other mortgage and housing experts believe that in order for the qualifying rate to really deter more homebuyers from coming onto the scene, it would need to be raised at least 50 bps or more.
While the qualifying rate may not change things that much, Finance Minister Jim Flaherty may be ready to allow Ottawa to step in and reform policy for mortgages. While Flaherty has said that he’s going to try and hold off for as long as possible in tightening mortgage rules (if he even does again,) he has said that he would step in and tighten rules on mortgage insurance, another measure which would ensure people are not taking on debt that they cannot afford.
