Test Rate Increase

By July 12, 2016Mortgage Minute

Test Rate Increase

The bank of Canada raised the benchmark rate (the test rate) last week from 4.64% to 4.74%.

That’s nice… what does that mean?

So… if a client wants a variable rate, Line of Credit, 1, 2, 3, or 4 year rate, they have to be able to afford a mortgage at 4.74%.  The idea is to qualify them at a higher rate, so they can still afford their mortgage if rates increase in the next 5 years.

The 5 year fixed rate mortgages can be qualified using the actual rate that the client will be getting (i.e. 2.49%).  5 years out is far enough that they assume there will be some career advancement, savings, mortgage pay down, etc to offset any rate increase.

On the typical $330,000 mortgage, the test rate increase will increase the “test” monthly mortgage payment by about $19.  The GDS and TDS will increase by less than 0.5%.

The impact on qualifying will be minimal, but it is an interesting tweak by the Bank of Canada to say that they are concerned about the markets in Vancouver and Toronto.

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