Changes to Qualification Rates
We have received an update from Canada Mortgage and Housing Corporation (CMHC) regarding the upcoming changes that we informed you about in mid-February. To briefly recap, fixed rate mortgages with terms of less than 5 years, as well as variable rate mortgages, will be reviewed for approval (qualified) based on 5 year rates, beginning April 19, 2010. It was not clear at the time of the announcement if the 5 year rates used for qualification would be discounted rates (currently 3.89%) or posted rates (currently 5.39%).
CMHC has now clarified that the qualifying rate for the affected terms will be the greater of the “benchmark rate” and the contract interest rate. CMHC defines the benchmark rate as the Conventional Mortgage – 5 Year rate published by the Bank of Canada (series 121764), which is currently 5.39%. The following are updated examples that illustrate the upcoming changes:
Fixed rate mortgages with terms of less than 5 years will be qualified based on the greater of the benchmark rate and the contract interest rate, rather than the current method of qualifying clients based on their contracted interest rate. For example, a client selecting a 3 year fixed term today would qualify based on 3.40% (some lenders offer lower “sale” rates), the new criteria will instead require the client to qualify based on the 5 year benchmark rate (currently 5.39%). If however the client selected a 5 year fixed term (or longer), the client would qualify at the contract rate (currently 3.89% for a 5 year term).
Variable rate mortgages will also be qualified based on the greater of the benchmark rate and the contract interest rate. By comparison, variable rate mortgages are currently reviewed based on 3 year rates. Assuming that posted rates are used in both cases, a client will need to qualify based on the 5 year posted rate (currently 5.39%), rather than the 3 year posted rate (currently 4.30%), which reduces the maximum amount that a client can borrow.
Changes to CMHC policies re: Self-Employed borrowers
Effective April 9, 2010, self-employed borrowers with more than 3 years in the same business will be required to provide third-party validation of income (e.g. financial statements, contracts, T4s, Notice of Assessments, etc.). This means that the above category of self-employed borrowers will need to fully support their personal income with adequate documentation when obtaining a mortgage.
Shirley Froese
Mortgage Agent
CENTUM Elite Mortgage Corp.
Ph: 780-940-4813
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