Lenders want to make sure you can afford higher mortgage payments if interest rates soar. So does the government.
That’s why regulators created the mortgage qualifying rate (MQR) — a.k.a., “benchmark qualifying rate” or “benchmark interest rate.” The MQR is the interest rate most commonly used to “stress test” borrowers.
Stress testing is the process of calculating a borrower’s debt ratio to ensure it’s not too high. Basically, a lender divides your monthly obligations by your gross monthly income. It then compares that number to an established limit (e.g., 39%). If your debt ratio is at or below the limit, you pass this “test.”
Here are 10 other things mortgagors need to know about the mortgage qualifying rate:
- The MQR is equal to the Big 6 Banks’ typical posted 5-year fixed rate. That’s usually about 2 percentage points above the actual 5-year fixed rate that most people pay. You can find the current MQR here (look for “Conventional mortgage – 5-year”). As of this writing, it is 4.84%.
- Your mortgage payments are always based on the actual rate you pay (i.e., the “contract rate”), not the MQR.
- If you’re getting a mortgage that’s default insured, all lenders will stress test you using the MQR.
- The MQR also applies to uninsured mortgages at all federally regulated lenders (e.g., banks), but only if the term is less than five years or the rate is variable. You must also qualify at the MQR if you get a HELOC at a federally regulated lender.
- In actuality, most lenders are supposed to stress test you using the greater of your actual mortgage rate or the MQR, but it’s rare that your mortgage rate will exceed the MQR.
- OSFI has proposed applying a stress test to all uninsured mortgages at federally regulated lenders, effective fall 2017. The stress test it proposes is 200 basis points above the contract rate. This is different from the current MQR.
- The MQR is published every Thursday by the Bank of Canada. It takes effect (on insured mortgages) the following Monday. It equals the mode average of the Big 6 Banks’ posted 5-year fixed rates.
- Esoterica: When there is no mode, the MQR is the rate closest to the simple 6-bank average. When there are multiple modes, the MQR is the mode closest to the simple 6-bank average. When there are two modes of equal distance from the simple 6-bank average, the MQR is the mode from the banks with the largest value of assets booked in Canadian dollars.
- Credit Unions aren’t required to use the MQR for uninsured mortgages. At the moment, neither are banks when it comes to 5-year fixed terms. Instead, these lenders let you qualify at your actual contract rate. Other things equal, this lets you get approved for a bigger mortgage.
- How often do rates jump 200+ bps within a five-year span? Well, ever since inflation targeting began in the early 90s (i.e., in the modern rate era), it’s happened:
- Only twice in the case of five-year fixed rates
- Only three times in the case of variable rates. In all of the above cases, rates fell to new lows promptly thereafter. (Source: Bank of Canada)
- If you want to qualify for a mortgage, there are five common ways to beat the stress test:
- Get a smaller mortgage (e.g., put more money down)
- Add more income (e.g., add a co-borrower to your application)
- Reduce/eliminate some of your debt payments
- Choose a 5-year fixed term (This applies only if you have 20% equity and get an uninsured mortgage. Again, this may no longer be possible at banks if OSFI enacts its new stress test in the fall of 2017.)
- Choose a non-federally regulated lender (e.g., a credit union; but prepare to pay higher interest rates).
If you want to know whether you pass your lender’s stress test, simply ask that lender (or any mortgage broker) to calculate your debt ratios. They’ll ask you some questions about your income, debts and mortgage. Then they’ll do the math. Competent mortgage advisors can generally tell you if you qualify in about 10-15 minutes. (Note: If you own more than 1-2 properties, it’ll take them longer to do the numbers.)