The Bank of Canada Qualifying Rate has been reduced to 5.19% from 5.34%. This is commonly referred to as the “Benchmark Stress Test” that is used when assessing and qualifying a Borrower(s) for a mortgage in Canada. This benchmark rate is based upon the Bank of Canada conventional five-year rate and is around 1.50% higher than most mortgage interest rates available through the broker channel. With all factors being equal a reduction in the qualifying rate means that you can buy more home now than before the change in the rate.
The purpose of establishing a qualifying benchmark is to manage the risk the Borrower is exposed to when purchasing a home. Namely, the erosion of future cash flows leaving less disposable income to apply towards their mortgage payments. The monetary policy of the Federal Government and the Bank of Canada set interest rates, economic flow and manages inflation. In addition to these factors life changing events can reduce available income and risk homeowner solvency. Life changing events include:
- Replacement of motor vehicle
- Acute or Long Term Illness
- Birth of a Child
- Marriage and Divorce
- Death of a Spouse
- Job Loss, Change and/or Wage Reduction
- Early Retirement
- Move
- Natural Disaster
- College and/or Education
- Income Tax
- Credit Card Debt
- et al
This reduction in the qualifying rate will allow you to purchase more home with your current income. But I would ask you – will you be happier with 1.4% more home – if you already qualify for a mortgage at 5.34%.
Instead I invite you to challenge yourself and consider this as an opportunity. An opportunity to set money aside for life changing events that may arise suddenly without forewarning. Set yourself a plan to prepare for the unexpected events that will cause stress if you have not done so already. Set the future cash outflows that you would normally have spent on the larger mortgage in an instrument that will generate any return and accessible when you need it, and talk to your Financial Planner for support in this area.
Preserve the cash in your wallet for a rainy day to address life events.
Take the “Stress Test” and turn it on it’s head!, and see it for what it is – a Great Opportunity!
Randell is an Accountant in Private practice and a Mortgage Broker with DLC Powerhouse Mortgages. If you want to contact Randell he can be reached at 306-541-5438.