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Residential Market Commentary - Qualifying rate conundrum

The Bank of Canada’s Qualifying Mortgage Rate has popped back onto the real estate radar. Back in July the central bank lowered the rate for the first time in nearly three years.

The idea behind the QMR is to ensure that home buyers will be able to afford their mortgage as interest rates rise in the future. It is a stress test that sets the lowest “theoretical” interest rate the buyer will be charged. That rate is significantly higher than any actual rates being charged by mainstream lenders.

The Bank of Canada bases the qualifying rate on the five-year rates posted by Canada’s Big Six, federally regulated banks. The number is rather arbitrary, though, because the big banks do not actually charge their posted rates. The real rates are markedly lower. The posted rates tend to have more to do with the penalties charged when a home buyer breaks their mortgage before the end of its term.

There is no obvious standard for setting the qualifying rate. A well known Toronto mortgage broker uses this illustration: two years ago the yield on Government of Canada five-year bonds was 1.42% and the QMR was 4.64%. Earlier this year, five-year bonds were back at 1.42%, but the QMR was 5.19%.

It is important for consumers to know that the current rules around the qualifying rate tend to favour the big, federally regulated banks. For example, the QMR stress test is not applied when customers renew their mortgage with their existing, federally regulated lender. This can have the effect of trapping customers who might otherwise be able to take advantage of lower rates with a different lender.

Many in the mortgage industry have been calling for more transparency and consistency in the QMR rules in order to make them fairer and simpler.