Article Review - Mortgage gap created by the posted rate
April 5, 2017 | Posted by: Steve Dainard
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Canadian mortgage rate gap leads to tough decisions for homebuyers
One of the new requirements in Ottawa’s recently tightened mortgage rules is the condition that consumers qualify based on the Bank of Canada’s posted rate for a five-year fixed-rate mortgage.
Although that rate has stayed at 4.64 per cent since October 2016 when the rules were announced, qualifying with the current mortgage rate remains a heavy burden for those looking to buy a home across Niagara and beyond. It also creates a huge gap when it comes to deciding how you’ll pay, since consumers can lock in a rate as low as 2.28 per cent for five years.
This Financial Post article explains the impact this could have:
Many hopeful buyers are watching mortgage deals fall apart when their bank refuses to finance them after they’ve assumed they’ll qualify on the interest rate they find online.
Consider the math behind the problem: With the average home in Canada selling for $551,400, you’ll need $30,140 to get a loan for $521,260. (Note: you must have five per cent down on the first $500,000 of a home and 10 per cent on any portion ranging from $500,000 to $1 million.)
This means that your monthly mortgage payment at the 4.64 per cent rate (based on 25-year amortization) would be $2,925.74. But at 2.28 per cent, that monthly payment decreases to $2,278.35.
The first figure is the one to qualify for based on a ratio of how much of your monthly income can go to debt and housing costs. The second number is what you’ll end up paying.
Although the total debt service ratio must be under 44 per cent, Canada Mortgage and Housing Corp. recommends these ratios should be at 32 and 39 per cent for affordability purposes.
You may be able to use the gap money to make mortgage prepayments, but you should ask what your rate of return is.
After five to six months of the new mortgage rules, we’re seeing cracks in local economies and some believe the posted 4.64 per cent qualification rate is too high. If people don’t have money to spend elsewhere, some are concerned that we could see a consumer recession.
Thanks for reading! If you want to read the entire article, please download the attached PDF file with highlighted points-of-interest HERE .