Government of Canada Mortgage Qualification Rate Simply Explained

Today the Government of Canada increased its mortgage qualification rate from 4.64% to 4.84%. But actual mortgage contract interest rates are still at all time lows, well under 3% for 5 year fixed rates. This difference between the qualification mortgage rate, and actual contract rate is an important difference for anyone seeking a mortgage to understand.

What is the qualification mortgage rate?

In late 2016 the Government of Canada announced that many mortgages in Canada will need to qualify at a specific mortgage rate set by the Government. This imposed rate acts as a threshold or a ‘stress test’ for mortgage qualification and affordability, and in no way resembles the actual best mortgage rate received by you, the borrower.

Why the qualification rate?

The Government is always looking for new ways to cool the housing market and protect the economy from a potential housing crash, like the one seen in United states in 2008. The mortgage qualification rate limits how much buyers can afford, because a higher mortgage rate means higher payments, and therefore less affordability. Again, the actual mortgage payment is lower, but if these lowest rates ever did go up to what the qualification rate is (let’s say on the renewal date), then we know that the borrower would still be able to afford the home, and the likelihood of a foreclosure would be very low.

In short, the qualification rate reduces maximum mortgage affordability by about 20%.

What are some of the main effects of this?

The hardest group hit by the qualification rate are first time buyers. This is because many first time buyers are near the start of their careers and the income needed to qualify for even a starter home in the $300,000 – $400,000 range can be relatively substantial for those just starting out.

Once home equity builds and household income increases over the years, the need to max out mortgage affordability becomes less of an issue for many borrowers.

For any questions on how much you qualify for, and how the government of Canada mortgage qualification rate might apply to you, contact us at your convenience for a free, no hassle conversation.