BoC increases key metric to assess eligibility for homebuyers

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 fiveyear fixed mortgage rates in recent weeks as the cost of borrowing rises.