Finance Minister, Bill Morneau, announced changes to the benchmark rate that will come into effect on April 6, 2020. This is the rate a consumer has to qualify at for an insured mortgage, also known as the “Mortgage Stress Test.” The new benchmark rate will be the weekly median 5-year fixed insured mortgage rate from mortgage insurance applications, plus a 2% buffer.
The benchmark rate just got more dynamic, moving with the rate markets weekly.
In today’s market, with record-low mortgage rates, this is a positive change. Buyers will gain a little more buying power. For example, current mortgage rates are around 2.74% (depending on many factors – this is for illustration purposes only), add 2% for the new rule, that would bring the benchmark rate to 4.74% ( 2.74% + 2% = 4.74%) vs 5.19% is where it sits currently.
On the other hand, in the past rates have risen drastically in a short time period. In a rising rate environment, the benchmark rate could exceed 4.74% very quickly, voiding a home buyer’s maximum pre-approval amount. If rates were to rise to 2.99% a week after being pre-approved, the qualifying rate would increase to 4.99%. This can start to complicate things.
Working with an experienced mortgage broker is becoming more important than ever.
It is important while shopping for a home that you are in regular communication with your mortgage broker. They will confirm your pre-approval number is accurate based on today’s rates. This will ensure you are shopping within your budget. If you are planning on spending the maximum amount on a home, you would need to beat rising rates that could affect your maximum mortgage amount.
Weekly changes to the benchmark rate could force buyers to rush into homeownership.
We still consider a 2% buffer to be a little overkill. Since the introduction of the stress test in 2016, first-time home buyers have struggled to qualify for a mortgage. Even with the new First-Time Home Buyer Incentive, no one is cutting them any slack to enter the housing market.
Find out how much you can afford before shopping for a home. A mortgage pre-approval will keep you focused on looking for homes in your price range. If you qualify for a pre-approved mortgage, you’ll know the maximum mortgage amount you can afford, and secure an interest rate during the mortgage pre-approval.
Our affordable mortgage options will help you achieve your financial goals and save you thousands of dollars. We provide a free service; contact us today.