How Much Does An Increase In Benchmark Really Affect You?

By now you must have heard about the mortgage qualifying “Stress Test”. The Stress Test was implemented to protect you so that if rates substantially increase during your term, come renewal time, even with the higher rate, you should still be able to afford your mortgage payments. Basically:

(1)    If you are applying for an “insured” mortgage with less than 20% down, you must qualify for mortgage payments based on a BENCHMARK RATE instead of your actual contract rate.

(2)   If you are applying for an “uninsured” mortgage with 20% or more down, you must qualify for mortgage payments based on THE GREATER OF the Benchmark Rate or your contract rate PLUS 2%.

Also, there’s actually a whole category of uninsured mortgages that qualify under Insurer guidelines and are called “inusrable” mortgages but that’s a whole other newsletter for a differnet day.

Today, our focus will be on the Stress Test for INSURED mortgages.

THE BIG NEWS:

On Wednesday, May 9, 2018, the qualifying Benchmark Rate INCREASED from 5.14% to 5.34%.

BY THE WAY, BENCHMARK RATE FUN FACT:

You may have heard how the Banks (starting with TD and RBC) increased their POSTED 5-year fixed rates at the beginning of May. Many people confused this with Prime by thinking the increases were triggered by a decision by the Bank of Canada. FALSE!

POSTED rates are determined by the Bank and the average of the Posted Rates for the Big 6 Banks is what determines the Benchmark Rate used in the qualifying Stress Test for insured mortgages!

KEEPING SOME PERSPECTIVE:

So let’s say you want a mortgage of $300,000:

• Mortgage payments at today’s standard 5-yr fixed rate of 3.34% would be $1,498/month
• Potential mortgage payments at the previous Benchmark Rate of 5.14% came to $1,799/month
• Potential mortgage payments at today’s Benchmark Rate of 5.34% come to $1,834/month

When it comes to Banks deciding if you can manage your mortgage payments, they want to know that you can afford potential mortgage payments as high as $1,834/month.

So what’s the damage?

For every $100,000 mortgage, the decrease in purchasing power for an insured Borrowers is $2,000*.

*Estimate may vary depending on property taxes and heat costs.

WHAT IF YOU ALREADY OWN HOW DOES CHANGES IN BENCHMARK AFFECT YOU?

It doesn’t! You’re already locked into your mortgages so unless you choose to refinance or move Lenders at renewal time, you won’t need to requalify for your mortgage.

That being said, if your mortgage is currently with one of the Big Banks and you try to break early from any Fixed interest rate mortgages, you will likely notice a large increase to your penalty as the Bank’s POSTED rates (RECALL: which increased in early May) affect penalty calculations… a LOT (bonus of sometimes going with a Monoline Lender).

IN OTHER NEWS:

I didn’t cover it in this month’s newsletter but a lot of you (especially the ones who have a variable rate mortgage or a HELOC) may have questions about upcoming increases in PRIME RATE. Economists are predicting another two increases this year, another one next year, and possibly more to follow. Unfortunately, no one can predict the future so we have to just keep waiting for the Bank of Canada to make their move.

The next Bank of Canada meeting is on May 30th but the most common rumors suggest an increase at the following meeting on July 11th. You can follow me on Facebook or Twitter for instant updates but I will also update you again in the June newsletter.

If you would like to discuss how the changes in Benchmark Rate impact you OR you would like to secure a rate hold pre-approval, please do not hesitate in contacting me at 780-863-0700.

Remember, call Minn for MINN-imum Stress, Maximum Service.