The use of teaser rates in qualifying individuals is a game the banks have played to increase their mortgage volumes. This spins back into the Canada Mortgage and Housing Corporation insurance scheme. It allows Canadians to spend more than would otherwise be the case, and puts thousands of homeowners at risk. The Government of Canada is where this all ends up. The loose, who cares attitude displayed by successive governments has created this house of cards. This is another US-style residential estate “melt-down” in the making. Nero (Justin Trudeau) continues to fiddle. Just wait to Rome starts to burn! There won’t be a firehose in the place.
This is discussed in a MoneySense article highlighted above. It’s an article well worth reading.
Mortgage Qualifying Rate
Under current Canadian mortgage qualification rules, home buyers can only get a mortgage if their debt-ratios show that they can make payments based on the Bank of Canada’s qualifying rate. This mortgage qualifying rate (MQR) is based on the posted five-year fixed rate and, as of June 10, hovered around 4.65%.
Even if a home buyer opted for a five-year variable rate mortgage, at 2.4%, they’d have to prove to the lender that they could make monthly mortgage payments based on the 4.65% MQR. On a $650,000 home, with 10% down, that’s a difference of almost $700 per month.
The rationale for using the posted rate to qualify buyers is to “…protect Canadians by ensuring sufficient flexibility to support mortgage payments at higher interest rates in the future, for example, when the mortgage term is up for renewal. This requirement also protects taxpayers who support homeownership through government-backed insured mortgages,” explained the Department of Finance through email.
“But home buyers who opt for a five-year fixed rate are exempt from having to qualify at the posted rate,” explains Ross. “These buyers can qualify at the discounted rate.” In 2015, the average discounted rate for fixed-term mortgages was 2.8%. This mortgage qualification loophole was confirmed in an email from the Department of Finance, which stated: “…borrowers with five-year fixed-rate mortgages may qualify based on their contract rate.” A contract rate is the equivalent of a discount rate—and, at present, about 200 basis points below the stress-test mortgage qualifying rate.
It seems likely that there have been renewals of five year fixed rate mortgages that whose qualifying rates were lower than the posted rate. It begs the question as to how these renewals have been handled. Why has there been no stress on the borrowers to date?