The Bank of Canada decreased its 5-year benchmark mortgage rate by 15 basis points from 5.34% to 5.19% earlier this week. So, what does this mean for homebuyers?
In short, they now can qualify for more home.
According to calculations by Ratehub.ca, a borrower with an annual household income of $100,000 with a 20% down payment and a 5-year fixed mortgage of 2.70% amortized over 25 years would have qualified for a home valued at $589,000 at the previous benchmark rate of 5.34%.
However, with the new qualifying rate of 5.19%, they can now afford a home valued at $597,000, which is a difference of $8,000 (1.4% more home).
“The change in the Bank of Canada 5-year benchmark rate now means that Canadians can qualify for more home today compared to earlier this year and 2018,” James Laird, president of CanWise Financial, said. “This decrease alleviates some of the pressure on first-time homebuyers, who are the most financially strained Canadians entering the housing market.
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The Bank lowered its qualifying rate as a result of the big banks decreasing their own 5-year posted rates.
The Bank of Canada’s 5-year benchmark is used for Canada’s mortgage stress test, which is the rate at which Canadian borrowers are stress tested against when applying for a mortgage. Borrowers with a down payment of less than 20% of their home price must qualify for a mortgage at the Bank of Canada’s posted rate, which is now 5.19%.
Borrowers with a down payment that’s greater than 20% of their home price are stress tested against the higher of either their mortgage rate, plus 2%, or the Bank of Canada’s posted rate.
The Bank lowering its qualifying rate has coincided with record-low five-year fixed rates, meaning now is a great time to lock in a mortgage rate, according to Laird.
“Five-year fixed rates are also currently at historic lows, according to data from Ratehub.ca, so now is a good time for Canadians to qualify and secure a mortgage rate.”