Central bank raises key metric used to determine mortgage eligibility

TORONTO — The bar is now higher for homebuyers to qualify for mortgages in Canada after the central bank raised a key metric used in stress tests that determine borrowers’ eligibility.

The Bank of Canada raised the conventional five-year mortgage rate from 5.14 per cent to 5.34 per cent after all Big Six banks raised their posted five-year fixed mortgage rates in recent weeks.

The central bank qualifying rate is separate from the actual mortgage rates offered by banks to borrowers, but is used to assess homebuyers who are seeking loans.

Homebuyers with less than a 20 per cent down payment seeking an insured mortgage must qualify at the central bank’s benchmark five-year mortgage rate.

And as of Jan. 1, buyers who don’t need mortgage insurance are required to prove they can handle payments at a qualifying rate of the greater of the central bank’s five-year benchmark rate or two percentage points higher than the contractual mortgage rate.

“Mortgage borrowers will be qualifying for less than they were able to earlier this year,” mortgage broker Samantha Brookes said in an email. “With all the new rule changes, we’ve definitely noticed the effect on the market with home purchases, renewals and refinances.”

The higher rates come as an estimated 47 per cent of all existing mortgages will need to be refinanced in 2018, up from the 25 to 35 per cent range in a typical year, according to a recent CIBC Capital Markets report.

The increase is an unintended consequence of various rounds of regulatory changes in the past few years aimed at reducing risk coupled with rising house prices that made it harder for homebuyers to qualify.

Borrowers who find the bar too high for the home they want can make some adjustments in order to make a purchase, she said. Those options include purchasing a smaller home and taking on less mortgage, or purchasing where prices are lower, added Brookes, who is founder of Mortgages of Canada.

The jump in the mortgage qualifying rate comes after Canada’s largest lenders raised their benchmark posted five-year fixed mortgage rates in recent weeks as the cost of borrowing rises.

In late April, TD Bank was the first of the Big Five lenders to raise the benchmark rate, increasing it from 5.14 per cent to 5.59 per cent, due to factors including the “competitive landscape, the cost of lending and managing risk.” Royal Bank of Canada, Canadian Imperial Bank of Commerce, National Bank of Canada, Bank of Montreal and the Bank of Nova Scotia followed suit, but with smaller increases.

The slew of bank moves was preceded by a rise in government bond yields. The yield on the Government of Canada benchmark five-year bond was 2.16 per cent on Tuesday, compared to 1.01 per cent a year earlier. Fixed-rate mortgages tend to move with government bond yields of a similar term, reflecting the change in borrowing costs.

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