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2180 Steeles Avenue West,
Suite 204, Concord,
ON, L4K 2Z5

Phone:     905-761-7001
Toll Free: 1855-761-7001
Fax:          905-761-7005

Email: mortgageadvisor@rogers.com





19 July 2019

The first decline of a qualifying mortgage rate since B-20 took effect

It’s the first time that the interest rate used for mortgage stress tests went down since 2016. As a result, it’s slightly easier for borrowers to get a mortgage today, especially for first-time homeowners who have been facing extra difficulties with the B-20 stress test. The benchmark posted 5-year fixed rate was down from 5.34% to 5.19%, marking the first decline since May 9, 2018. Moreover, it’s the first drop since Sept. 7, 2016, even in spite of a 1.06% decline of Canada’s 5-year bond rate since November 8, 2018.

The qualifying mortgage rate is released each week by the banks and then posted by the Bank of Canada every Thursday. The BoC studies posted 5-year fixed rates of the six main banks’ every Wednesday and uses the average number to determine the official benchmark. During the previous 18 months, since the revised B-20 stress test was introduced, the posted rates have exceeded the rates, which banks are ready to offer, by about 2%. They expect borrowers to negotiate and push the rate lower.

As a result, those who don’t have enough knowledge in this area, may end up with a mortgage at a much higher rate than the experienced buyers. At the same time, mortgage brokers don’t use posted rates, as they offer the best variants available from the beginning.

The mortgage qualifying rate is used by the federally regulated lenders to determine borrowers’ hypothetical mortgage payments. Potential borrowers have to prove they can manage such payments in order not to exceed the bank’s debt-ratio limits.

The influence of the B-20 stress test has been very strong and it’s still seen in all the segments of the real estate market. The new regulations distorted sales activity before and after their introduction. TD Bank economists say the B-20 has reduced Canadian home sales by about 40k during the period from 2017 Q4 to 2018 Q4. In addition to it, there are disproportionate influences on the hot markets of Toronto and Vancouver, and on the first-time homebuyers. With no other changes, in case we cancel the B-20 regulation at once, home sales and prices may be 8% and 6% higher, respectively, than today’s forecasts, already by the end of the next year.

Today’s rate decline means the following for a borrower purchasing a property with 5% down:

  • If you earn $50,000 a year, you can afford a home which costs $2,800 (1.3%) more
  • If you earn $100,000 a year, you can afford a home which costs $5,900 (1.3%) more
    (If you have a 25-year amortization and no other debts. Figures are rounded)

Today’s rate decline means the following for a borrower purchasing a property with 20% down:

  • If you earn $50,000 a year, you can afford a home which costs $4,000 (1.4%) more
  • If you earn $100,000 a year, you can afford a home which costs $8,300 (1.4%) more
    (If you have a 30-year amortization and no other debts. Figures are rounded)

Such a 0.15% decline will not affect the most problematic markets drastically, but it will provide a positive psychological influence on buyers. Moreover, it could act as a counter force for the slowest lending growth in five years.


 

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