As of November 1, 2012, OSFI (Office of Superintendent of Financial Institutions) requires lenders to qualify conventional and insured variable mortgages using Bank of Canada's benchmark rate. Will this lead to the end of variable mortgages? Prior to November 1, 2012, all insured mortgages were required to qualify based on Bank of Canada's benchmark rate. The new rules will restrict Canadians' ability to qualify for conventional variable mortgages and conventional shorter term (1-4 year) mortgages.
Here is an example:
Annual Income: $100,000 Mortgage Amount: $450,000 (assuming 20% downpayment) Annual Property Tax: $4,500 Annual Heating: $1,200 Monthly Car Lease & Personal Debt: $750
Prior to the new mortgage rules, the borrowers would have qualified for a variable mortgage using a 3 year rate which have put the GDS/TDS ratios at 28.67/37.67. As of November 1, 2012, the GDS/TDS is 35.3/44.29 since the Bank of Canada benchmark rate (currently 5.24%) is used to qualify.
Is This The End Of Variable Mortgages?
As you can see, the borrowers will be forced to take a fixed mortgage for 5 year term or longer since they can't qualify for a variable mortgage. My issue with the new mortgage rules is how will anyone qualify for a variable mortgage or fixed mortgage of 1-4 year term when the benchmark rate is at 7-8% as rates normalize in the future? Having borrowers lock into longer terms than they need to might result in paying IRD (interest rate differential) penalty to get out of the mortgage which can be exorbitant.
The solution to this issue is putting more downpayment if possible to get the mortgage qualification ratios in line.
To discuss your downpayment options and how to qualify for short term fixed mortgage or variable mortgage, please contact me.