Bank of Canada Qualifying Rate Drops to 5.19% Effective July 22, 2019

Qualifying Rate Change

First Foundation Mortgages has just received word that the Bank of Canada 5-year Benchmark Qualifying Rate will go down by 25 basis points effective July 22, 2019. The Qualifying Rate is the rate used in the now infamous "mortgage stress test" which seeks to help grown adults make decisions about their finances that will prevent them from pain and suffering the future if and when rates go up.

We will provide more information here as information becomes available. In the meantime here's a refresher on the Qualifying Rate and Stress Test.

This change will be welcome by many as mortgage brokers (like us), some banks, economists, many in real estate and construction, as well as some industry associations like Mortgage Professionals Canada (PDF) have been calling for a reduction to the qualifying rate in light of falling real market mortgage rates.

"At 2 percentage points above the actual contracted rates, the stress tests on insured and uninsured mortgages are causing serious and undue negative impacts to the Canadian economy and to the housing market." -- Paul Taylor, President and CEO of Mortgage Professionals Canada

Many arguments have been made in favour of the stress test, most notably from Evan Siddall at CMHC as well as the people in charge at OSFI, the Office of the Superintendant of Financial Institutions. They argue that the stress test ensures that Canadians don't get overleveraged by buying a home that they actually qualify for now (based on the contract interest rate of their mortgage at the time of purchase), which they might not qualify for in the future (if rates go up).

The arguments against the stress test include, but are not limited to:

1. We already have a "stress test". It's called underwriting. Government or lenders could have just reduced TDS ratio requirements and achieved much the same effect.
2. The stress test is ok, but the number is arbitrary and made up and doesn't reflect the reality of the market today because it's almost 3% higher than real contract rates (at the time of this post). People are getting mortgages in the mid 2% range and needing to qualify at 5.34% (now 5.19%). That gap is huge.
3. The stress test doesn't take into account any of the likely things to happen over the next five years, such as some price appreciate, payment of principal on a home, rising wages, etc.

Time will tell if further reducitons will follow in order to make the Qualifying Rate more reasonable relative to market rates.