The five-year benchmark qualifying rate is now 4.94%, down from the previous 5.04%.
The five-year fixed benchmark qualifying rate has been used to qualify mortgages since the Fall of 2016, when the stress test was implemented. The qualifying rate is used in stress tests for both insured and uninsured mortgages. The lower rate means it’s easier for you, the borrower, to qualify for your home purchase or refinance.
So, what is the stress test?
The stress test was implemented for a few reasons. First, it was an attempt by the federal government to help decrease the frenzy of the housing market especially in specific markets.
It was also designed to help protect homeowners against potential interest rate increases. It helps to ensure that homeowners do have some buffer room in their monthly expenses when qualifying for a mortgage.
The benchmark rate is used to determine exactly how much mortgage you qualify for as a homeowner. When qualifying to purchase a home, two calculations are used, your Gross Debt Servicing and Total Debt Servicing. These ratios are specified by lenders and are generally 39% and 44% respectively.
Prior to 2016, we would use the interest rate you would actually receive on your mortgage to qualify you, since implementing the stress test we either need to use The Benchmark Rate (4.94%) or your interest rate plus 2% (whichever is higher). This was designed to protect borrowers across Canada against potential rising interest rates. The government wants to make sure that Canadians can still afford their mortgage payments when interest rates rise.
Given the current economic outlook, interest rates likely aren’t going to rise for some time, but the reality is making sure Canadians have that extra buffer in their monthly expenses is good for any economic uncertainty. With that being said, it is excellent news that we now have a lower Benchmark Rate to qualify you with!
Now, what does the new five-year benchmark rate mean for First Time Home Buyers?
This means that the tables are turning… slowly.
If you were previously impacted by the amount you were able to qualify for, this is great news for you and offers a hopeful future for you getting into the home of your dreams! Every bit of extra purchasing power means more ability for you to find that dream home.
Maybe you’ve been constantly outbid in bidding wars or have just felt slightly outpriced in your dream neighbourhood. This extra boost might be enough to get you what you need.
Take a look at the snapshot below for a basic scenario on the increase in purchasing power, while it might not seem like a ton, every penny counts!
Don’t hesitate to contact your local agent at The Windrose Group to learn more about what this means for you, your family and your homeownership dreams!