Saturday, March 6, 2010

Borrowers will need to qualify for 5-year posted rate

From Canadian Mortgage Trends
For all variable-rate mortgages and fixed terms under five years, the new qualifying interest rate will be the greater of:
  • the chartered bank 5-year posted rate (5.39% today), and
  • the contract rate.

The posted qualifying rate will be published by the Bank of Canada each Monday at approximately 12:01am Eastern Time. Here’s the link: Posted Mortgage Rate (Look for series V121764.)

Previously when the Finance department tightened mortgage rules for CMHC loans, I thought they would be limited because of how low discount 5-year rates were. Now that it is the posted rate I think it will be successful limiting the amount of risk*** borrowers are capable of taking past April 19th. There is a concern of what impact this will have to the overall market but If the recent market strength was solely due to people stretching into 3% mortgages than a downturn was inevitable anyway.

***I misunderstood this rule - it actually only applies to those taking out terms under 5-year fixed. So the chance of rate shock occurring in 5 years to those stretching into the discount rate still exists. See previous post. At least this forces marginal buyers into 5-year terms.


squidly77 said...

thats gonna do it bear.

BearClaw said...

This will reduce demand by some amount for a period of time. However it will only impact some fraction of existing demand as the following are not affected:

Borrowing with 5-year fixed rate.
Those using other terms but not stretching to their maximum affordability.
mortgages with 20% down or more.

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