All of the biggest banks in Canada have raised their posted rates after TD raised theirs to 5.59 per cent. The Bank of Canada, which uses the mode of the posted rates of the Big Six banks to determine the minimum qualifying rate (MQR), bumped the MQR up to 5.34 per cent.
The qualifying rate is used to determine if you would be able to afford your mortgage if rates increased, and is the greater of your contracted rate + 2 per cent, or the MQR. If your contracted rate was 3.34 per cent, for example, this increase would have no effect on your mortgage, as you would have already had to qualify at 5.34 per cent (3.34 + 2). However, if your mortgage rate is lower than 3.34, this will apply to you.
How does this affect affordability?
A 0.2 per cent increase in the MQR causes a roughly 2 per cent drop in affordability. To afford a $300,000 house with 10% down, you would need to have an income of $61,575 at an MQR of 5.14 per cent. That same mortgage at 5.34 per cent would require an income of $62,775.
This isn’t the end of rate increases, however. The Bank of Canada checks the mode of mortgage rates every week and updates their benchmark rate accordingly. As some banks waited longer than others to raise their rates, it’s possible that there will be another increase to the MQR as early as next week, May 17, 2018.
As prime rate (the rate that banks use when loaning each other money) goes up, rates will too. As rates increase, posted rates go up – and you know what happens when posted rates go up.
Should I stick with my current lender?
Many banks are sure to remind their clients that you don’t have to pass a stress test if you’re renewing with your current lender. There are some people that may not be able to qualify anywhere else and will be forced to stick with their old lender, but not all.
Shopping for mortgage rates online is free – you should always look around before accepting your renewal offer. If you don’t know what’s out there, you won’t be able to get a better rate.
Remember, your mortgage’s principal has been decreasing since you’ve gotten it. When you apply at a new lender, they’ll only take into account the remaining balance, not the initial amount. If your principal is lower, it’s more likely you would qualify at the new MQR, even though it’s higher than before.
Don’t be afraid of checking out other rates! Even if it turns out that you aren’t able to switch lenders, at least you’ll know that you didn’t have another option.