New Benchmark Rate for Qualifying Insured Mortgages

New Benchmark Rate for Qualifying Insured Mortgages

The Minister of Finance, Bill Morneau just announced a “New Benchmark rate for qualifying insured mortgages” which will take effect on the 6th of April 2020. Here is a simplified explanation of the announcement. Please note that the explanation below is general in nature and is intended to help the reader get a basic idea about the expected effect from the change. You are advised to consult with your mortgage agent/lender for more information and/or to get a better idea as it relates to your specific situation. Please feel free to reach out to our mortgage agent Mohammad Abusaa (License# M16002334) at m.abusaa@akarat.ca or directly at 416-825-7775 for more information or inquiries.

Insured Mortgages:
“Insured mortgages” are mortgages/loans on properties that are above 80% of the property value. In other words, where a buyer is paying less than 20% down payment. If you plan to purchase a property with 20% or more down payment, then nothing changed for you. Also, insured mortgages only apply to properties with a purchase price that does not exceed $999,999 (so below $1m). So in summary, the new change only affects those buying properties for a price less than $1m and paying less than 20% down payment.

Current scenario:
If you fit the above profile, the “minimum” down payment you can pay on a purchase is 5% on the first $500,000 of the purchase price and 10% of the remaining (up to $999,999 of course). The remaining “loan” is what you are being qualified for. At the moment, in most of the cases (not all), a buyer will be qualified using 5.19% as the benchmark rate. After April 6th, 2020 that rate will change to 2% higher than what a lender is offering you “contracted rate”. So let’s say your lender is offering you 2.80% on a fixed 5-year mortgage, then your benchmark rate will be 4.8%. See the table below to illustrate the effect of the new change on the required income to purchase a property at $600,000.

 TodayAfter April 6th, 2020
Purchase Price$600,000$600,000
Minimum Down payment$35,000$35,000
Benchmark Rate5.19%4.80%
Minimum Household Income Required$141,000$136,500
Table above is based on 32% GDS & property taxes of $3,500 and no other debts/expenses

See the table below to illustrate the effect of the new change on the purchase price at an annual income level of $120,000.

 TodayAfter April 6th, 2020
Current Household income$120,000$120,000
Est. Maximum Purchase Price – with min. down payment$493,500$517,000
Table above is based on 32% GDS & property taxes of $3,500 and no other debts/expenses

Conclusion:
We can more or less assume that the effect of the change might mean that buyers in this category can now afford to purchase properties at 3-4% higher than what they can afford today OR buyers whose income need to be up to 4% higher (today) to qualify for a specific purchase, will be able to qualify for that purchase after April 6th 2020.

Again, please note that our aim here is to present a simplified version of explaining the expected change. Readers are urged to consult with their lenders/mortgage agents. Other factors will affect your specific situation such as your credit profile, property type, lender specific rules/regulations & qualifying debt ratios, condo fees, property taxes and other debts/expenses, etc.

For more information, contact us at info@akarat.ca


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