October 17 2016 there was a change to the mortgage rules for insured mortgages. An insured mortgage is one in which the borrower puts a down payment of less than 20% of the value of the property. The new rule requires these borrowers to QUALIFY at the contract rate or the Bank of Canada posted rate, whichever is greater.
To determine the qualifying rate,The Bank of Canada averages out the posted 5 year fixed rates of the Canadian banks. These posted rates do not incorporate the discounts that are often applied to the five year fixed rates. This makes the qualifying rate much higher than the actual interest rate used to determine the monthly payments of a borrower’s mortgage. With the new rule, the insured mortgages must use this higher rate to qualify the mortgage regardless of what rate is applied to the mortgage contract.
Simply put, the contract rate is the rate which is used to determine the monthly payments of the mortgage.
In conclusion, it is important for borrowers to understand that even though their mortgage application needs to use the higher qualifying rate to get the mortgage approved it does not mean this is the rate that will be applied to their mortgage contract. Most often their rate will have discounts applied and be lower than the Bank of Canada’s qualifying rate.