Understanding Bank of Canada Benchmark Rate:
The Benchmark rate is set by the Bank of Canada. It is calculated each Wednesday and set the following Monday. But what does "calculated" mean? Well, each week the BOC looks at the 'posted' 5 year rate from the 'Big 6' banks. An average is taken (using mode), and that becomes the benchmark rate. To find the most recent Wednesday calculation take a look here . 5.24% is today's minimum rate that all OSFI regulated lenders must use to qualify their conventional mortgages.
The biggest issue with the BOC rate is that it is an average of a posted rate which the vast majority of Canadians aren't actually getting. If the majority of lenders are approving conventional mortgages at 3.09, and use the 5.24% to approve their variable mortgages and terms for 4 years or less.
B-20: How it Impacts clients:
Scenario 1: Purchase
Joe and Jane have a combined average household income of $100,000. They currently have $750/mth in loan and lease payments. Let's also assume a $150/mth heat cost, and $400/mth property tax payment. They have 20% down from a gift, and really want that attractive 4 year special of 2.99%.
Using 2.99% (actual client rate): TDS is 38.2% and GDS is 29.3% Looks good, right? But, uh oh, we actually have a TDS/GDS issue, because it's a 4 year conventional and we must use that benchmark rate.
Using the 5.24% Benchmark Rate, TDS becomes 44.2% and GDS is at 35.3%.
So what are their options? They have to take the 5 year rate! That would mean qualification ratios would be 38.5%/29.5% using the 5 year actual 3.09% rate.
B-20 will have an effect on clients as it will limit the terms they can qualify for.
Scenario 2: Re-finance for a client who wants an Adjustable Rate
Now let’s look at a re-finance scenario for a client who wants an Adjustable Rate.
Sam and Sue have a $400,000 house, with a $250,000 mortgage and a whopping $100,000 in debt they want to consolidate. Household income is $100,000, and their credit score is 650. Unfortunately with the maximum LTV rule of 80% on a re-finance, they will still have $20,000 in debt remaining and that with their lease payment means $1200 /mth in payments. $150/mth in heat and $400/mth in property taxes. They want a 5 year ARM rate.
Under the ‘old’ rules where we could use the actual client rate of 2.80% (MERIX is offering P-20). We then moved to using 5 year fixed posted for ARM qualification. Now with the new B-20 rule, we must use the benchmark. Using 2.80%, they would have been approved as their TDS would be under 39% and GDS at 24%. However, using the benchmark rate of 5.24%. All of a sudden TDS becomes 43.9% and GDS is 29.4%. Unfortunately all things being equal, they no longer qualify for an ARM product due to that TDS. They have to go 5 year Fixed.
B-20 will significantly limit the number of customers who can qualify for ARM mortgages. Especially those re-financing who usually have higher TDS ratios to begin with.