Latest on mortgage pre-qualification changes

Preparing for a mortgage

If you have a rate hold or mortgage pre-approval in place, it is important you reach out to your mortgage person to double-check your numbers.

For the first time in a while, we are at a place where rising interest rates may change what you have been pre-qualified to borrow.

By way of context: In October 2016, the government introduced the stress test used for qualifying mortgage borrowers. Prior to this, what you could afford was based on your contract rate (the actual rate you would be paying on your mortgage). Since the stress test was introduced, the amount you are qualified to borrow is based on the greater of the Bank of Canada Benchmark rate (currently 5.25 per cent) or your contract rate plus two per cent.

For the last few years, five-year, fixed-rate mortgages have been trending anywhere from 1.59 per cent to 2.99 per cent, which means your qualification would have been based on the benchmark rate. The benchmark rate moved between 4.64 percent and 5.25 per cent.

Over the last few weeks, five-year, fixed-rate mortgages have crept up to over four per cent with many lenders. This means that if you opt for a fixed-rate term you would be qualified on your contract rate plus two per cent.

Lets do the math.

These calculations assume your family income is $90,000 and you are looking at buying a condo with property taxes of $2,200 annually and strata fees of $350 monthly. This scenario also assumes you have no other debts. I used $20,000 for your down payment.

As an example, the TD website is offering five year mortgages at 4.09 per cent. This means to qualify we would be using 6.09%.

At the qualifying rate of 6.09% you would be looking at a maximum purchase price of $385,000.

Back to the TD website. They are offering variable rate mortgages at 2.7 per cent. If you chose this variable rate mortgage you would be qualified based on the Benchmark rate of 5.25 per cent.

Based on the benchmark rate your purchase price increases to $415,000 (you would have to increase your down payment to $20,750).

In some housing markets the $30,000 difference in price point can meant the difference between a townhouse and a condo.

The conversation of choosing fixed versus variable is a whole other column. If you have chosen a variable or adjustable rate mortgage, remember that reasons that you chose this over a fixed rate. Now isn’t the time to panic and lock in to a fixed rate. Do the math and see how the recent rate increases actually affect your monthly payment and interest cost over the long term.

Either way, if you are out actively house shopping based on calculations from even a few weeks ago, I encourage you to reach out to your mortgage person to double check your numbers before you write an offer.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

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About the Author

Tracy Head helps busy families get a head start on home ownership.

With today’s increasingly complicated mortgage rules, Tracy spends time getting to know her clients and helps them to better understand the mortgage process. She supports her clients before, during, and after their mortgage is in place.

Tracy works closely with her clients, offering advice and options. With access to more than 40 different lenders. She is able to assist with residential, commercial, and reverse mortgages in order to match the needs of her clients with the right mortgage package.

Tracy works hard to find the right fit for her clients and provide support for years down the road.

Call Tracy at 250-826-5857 or reach out by email [email protected]

Visit her website at www.headstartmortgages.com

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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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