You’re Pre-Approved – Your Maximum Amount Fluctuates?
October 29, 2017 | Posted by: Shayne Beeler
Disclaimer – while I can (at times) understand the intent of mortgage rule changes, there are always unintended consequences. One we’ll talk about in this post has the potential to impact every single borrower that has been prequalified.
The Bank of Canada Qualifying Rate
This rate serves as the qualification standard when you’re qualifying for a mortgage. Also referred to as the “stress test”, this rate is currently 1.6% - 2.0% higher than the actual rate that you would be pre-approved for. At time of writing, this is targeted to all terms 5-years or less on “insured” (less than 20% down-payment) mortgages. However, as of January 1, 2017, a similar “stress test” will apply to all “conventional” (20% or greater down-payment) mortgages.
Example: $300,000 mortgage, 5-year fixed rate of 3.09%, 25-year amortization - $1433.63/month payment. To obtain this mortgage, you’re not actually confirming your income can qualify to make a $1433.63/month mortgage payment. In reality, you’re confirming your income can qualify to make a $1743.11/month payment – at time of writing, the “qualifying rate” has just changed to 4.99%. This $1743.11/month payment reflects a $300,000 mortgage at a rate of 4.99% with a 25-year amortization.
So why should anyone shopping for a home concern themselves with this? Because while you may have an interest rate “pre-approved” and “held/reserved” for a period 90-120 days depending on the lender, that rate doesn’t actually determine your maximum qualification amount.
THE BANK OF CANADA QUALIFYING RATE IMPACTS YOUR MAXIMUM MORTGAGE AMOUNT
I assure you the ALL CAPS was to draw your attention to this point and that I wasn’t cyber shouting. This qualifying rate has gone from 4.64% as recently as a few months ago to 4.99% as of late October.
To use an example, someone who qualified at an absolute maximum of a $350,000 purchase price when the qualifying rate was 4.64% (using a 5% down-payment in my calculation), would now only qualify at an absolute maxium of $335,000 given the increase of the qualifying rate from 4.64% to 4.99%. This borrower may very well still get the same interest rate they were pre-approved for a few months back, however, as you can see their purchasing power has fluctated.
So what’s the solution? Now more than ever, frequent dialogue with everyone that has pre-qualified for a mortgage is a must. Communication can still bring clarity, even if the layers of mortgage rule changes can add extra factors to sort through.
Does this impact everyone the same? Not necessarily – keep in mind, my examples are focusing on the “absolute maximum” someone qualifies for. Monthly budgeting is something we heavily focus on during pre-qualification discussions. Quite often, the mortgage and subsequent payment range a client targets is a fair bit less than the “absolute maximum”. In these cases, there would be more breathing room when qualifying rate fluctations like this happen.
As always – contact us any time and we’ll be sure to make maximum clarity out of how this may or may not impact you.