In his recent analysis, independent mortgage broker Calum Ross
observed that would-be buyers could secure a mortgage only if they can successfully make payments based on the current qualifying rate set by the Bank of Canada—currently at 4.65 per cent based on the posted 5-year fixed rate, as reported by Romana King for MoneySense
But while buyers with variable-rate terms (i.e., 2.4 per cent) have to prove to lenders that they can fulfill monthly payments based on the 4.65 per cent rate, “home buyers who opt for a five-year fixed rate are exempt from having to qualify at the posted rate,” according to Ross.
“These buyers can qualify at the discounted rate,” he added. The discount rate is set at 2.8 per cent as of 2015, and the exemption Ross pointed out was confirmed by the Department of Finance in an email saying “…borrowers with five-year fixed-rate mortgages may qualify based on their contract rate.”
Ross warned that this loophole might rear its head come renewal time for the 5-year fixed terms, which can compound the already startling rate of growth in household debt in recent years.
“Even a 1% increase in mortgage rates will hit homeowners hard, as this translates into an almost 40% increase in interest rates,” the broker said.
It’s not a fate set in stone, however, as the said loophole is actually poles apart from the “teaser rates” in the U.S., which are mortgages that are offered at low rates but then subsequently spike up to more crippling levels.
“Thankfully, regulations governing Canada’s banks and mortgage loans are actually quite different than in the United States, and far more stringent, but that doesn’t mean this current mortgage qualification loophole doesn’t pose a threat to the stability of Canada’s housing market,” the analysis concluded.
[Erratum: The previous version of this article quoted Ross as saying: “Even a 1% increase in mortgage rates will hit homeowners hard, as this translates into an almost 40% increase in their monthly mortgage payments.” The correct statement should read: “Even a 1% increase in mortgage rates will hit homeowners hard, as this translates into an almost 40% increase in interest rates.” Apologies for the error.]
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The existing regulatory regime governing mortgage qualifications in Canada has severe shortcomings that could lead to “over-leveraged” home owners and a future market crash, according to a Toronto-based analyst.