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What Is the Mortgage Qualifying Rate and When Do You Use It?

This piece was originally published on December 3, 2018, and was updated on October 24, 2022. 

Before granting you a mortgage, a lender will determine whether or not you can afford the loan amount you’ve requested.

There are a number of factors that the lender will use to determine your maximum affordability, including your annual income and debt obligations, your utility and living costs, as well as your chosen amortization period and mortgage rate.

When applying for a mortgage, a lender will ensure you can withstand rate increases and afford future mortgage payments by using the higher of either the Office of the Superintendent of Financial Institutions (OSFI) qualifying rate (5.25% in October 2022) or your contract rate + 2% to stress test you.

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Keep in mind that, in today's rising rate environment, even the lowest 5-year fixed rate + 2% will be well above the OSFI qualifying rate.  

Still, even in times when the OSFI qualifying rate is used to calculate your affordability, in reality, you’ll pay off your mortgage based on the current rate for that term and type.

How much mortgage can I afford?

Let’s consider a scenario where a couple with a total pre-tax income of $120,000 has a $50,000 down payment. They estimate their total monthly property taxes and heating costs will be $475, and they have no outstanding debt.

Because the best 5-year fixed rate they could access in October 2022 was 4.69%, they need to calculate what they can afford based on a stress test rate of 6.69% (4.69% + 2%). Using our mortgage affordability calculator, we see that they are able to purchase a property of $620,890 at a mortgage rate of 4.69% and an amortization period of 25 years. To focus on the amortization period and how it might affect your monthly payments, you can use our amortization calculator to generate amortization schedules under different length scenarios. 

Remember, the stress test rate is used to determine how much you can afford and if you meet the criteria with your lender. But your monthly payment will be based on the current mortgage rate associated with the term and type. While you may need to qualify using the 6.69% rate, your mortgage payments will be calculated using a rate of 4.69%.

 

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