Mortgages: the qualifying rate
Mortgages with variable rates or fixed terms under five years typically require that you qualify at a higher rate (called the “qualifying rate.”).
For example, if you apply for a 2.25%, 5-year variable mortgage, the lender might make you qualify at their posted 5-year rate (5.39% for example).
Qualifying rates are used to ensure borrowers can handle their payments if rates go up.
In practice, lenders use the qualifying rate to calculate your debt service ratios. Lenders then check to ensure your debt ratios are low enough to meet their guidelines.
Here are a few things to keep in mind:
Your payments are typically based on the contract rate (i.e., the regular rate you are quoted), not the qualifying rate.
As of April 19, 2010, all insured variable and 1- to 4-year fixed mortgages over 80% loan-to-value must be qualified using the posted 5-year fixed rate, as published every Wednesday by the Bank of Canada.
Some lenders also apply the Bank of Canada qualifying rate to uninsured mortgages, and mortgages with a loan-to-value of 80% or less.
Other lenders allow lower qualifying rates if the loan-to-value is 80% or less (e.g. they use a 3-year discounted fixed rate instead of the posted 5-year fixed rate).
Always count on having to qualify at a higher than posted rate. With rates so low, they are bound to rise eventually and you’ll want this worked into your budget!