Mortgage Qualifying Rates Explained
So you are looking for the best mortgage rate possible as well as how much you can afford. You are still undecided between the fixed and variable rate. Your mortgage broker tells you how much of a mortgage you can afford at the variable rate and the fixed rate…..but wait a second…..the amounts are different. Not only that, the variable rate option is a smaller mortgage amount even though the rate is less. How can that be?
The answer is quite simple. When a lender qualifies you for a mortgage with a term of 5 years or greater, they use the contract rate to determine the affordability. In other words they use the rate quoted on the commitment. This is not the case for variable mortgages or terms less than 5 years. In these cases they use the MQR (Mortgage Qualifying Rate) rate which is the 5 year posted rate. So even though the quoted rate for a variable might be prime less .70% (currently 2.05%) they qualify you based on 5.49% (the current 5 year posted rate).
Why do Banks use different rates to qualify my mortgage?
Lenders (and the Bank of Canada) want to be sure that you will still be able to afford your payments when/if interest rates increase over the life of your mortgage. We have all seen what happened in the United States when people were qualified at super low teaser rates and then could no longer make their payments when their rates adjusted upwards. That is less likely to happen in Canada since your variable rate would need to double before it moved above your qualifying rate. Of course there are no guarantees rates will never move higher than your qualifying rate, but atleast there is an extra measure of safety.
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