“The Bank of Canada Bench Mark Rate Is Now In Effect For Mortgage Qualifying”
As of November 1st, 2012, the Bank of Canada 5 year bench mark rate is being used to qualify mortgage applications where the interest term is variable and/or less than 5 years in length.
For both new home purchases, and debt consolidations, and mortgage refinancings, this is having and will continue to have an impact on many Canadians looking for mortgage financing.
How The B20 Rate Is Set
Before we get into the direct impact, let’s define what the B20 rate is.
Every Wednesday the Bank of Canada sets the bench market rate which is derived from an average of the posted 5 year fixed mortgage rates of the major banks.
The newly calculated B20 rate on Wednesday is then released to the public on the following Monday, and then put into use by mortgage lenders until a new rate is calculated.
At the present time, the B20 rate is approximately 5.25% even though the actual borrowing rate to secure 5 year fixed terms right now is more than 2 percentage points less.
Impact Of B20 Going Forward.
The B of C bench mark rate now needs to be utilized when calculating an applicants ability to debt service on any variable term or any fixed term under 5 years.
Because the B20 is considerably higher than the actual rates available in the market place, many consumers are not able to meet the debt servicing requirements attached to “A” mortgage offerings or the only “A” offering they can qualify for is a 5 year rate, pushing the market place more and more towards longer term fixed rate mortgages.
Coupled with the recent changes to loan to value ratios where the maximum allowable mortgage from a federally regulated lender is 80%, the B20 rate makes qualifying for a mortgage refinance to consolidate debt much more difficult to achieve.
This will impact home purchases as well as home purchasers are more likely to adjust their sights on properties they can afford under the new rules.
With mortgage refinancing, its a bit of a different story.
In a refinance mortgage for debt consolidation scenario, the debt already exists and the mortgage holder is trying to bring down the cost of overall debt and term it out over a longer period of time. So with less refinancing options available, cash flow stress will be harder to alleviate.
For anyone looking for variable rate mortgage, the spread between the current market rates for variable and the B20 rate is about 2.5%, or almost double current variable mortgage rates which are mostly at prime minus 0.20%, or 2.80%. So to qualify for that variable rate, you have to be able to show debt servicing ability for the B20 rate which in many cases will be impossible to do.
The Long And The Short Of It
The better mortgage rates are now harder to qualify for.
On the flip side, if you can’t qualify for a specific “A” mortgage rate right now, there are several very good sub prime offerings on the market that can work in the interim.
The key right now for all mortgage holders or prospective home buyers is to really understand your financial and credit profile to see what you can qualify for, and if you can’t qualify for a mortgage with a bank or institutional lender then its going to be important to build a plan to get yourself into “Finance-able Position” to lower your rate in the near future.
The new rules are not likely going away any time soon, so there is going to be a period of adjustment.
Even if you don’t need a new mortgage today, you would still be well served to gain an understanding of the new rules and see how your current level of debt, cash flow, and credit stack up against them.
One of the best ways to do this is to work with an experienced mortgage broker who can not only help you understand the changes in the mortgage qualifying process, but also calculate the numbers for different scenarios so you have a solid plan of attack moving forward for whatever your future mortgage needs may be.