What is the Qualifying Rate?

In 2010, the Department of Finance introduced the Qualifying Rate as a new way to assess borrower eligibility and ensure borrowers can handle their payments should rates begin to rise. Your lender will use the qualifying rate to calculate your debt service ratios, which must be at or below their guidelines.

The qualifying rate is a 5 year rate published every week by the Bank of Canada. For terms less than 5 years and for all variable rate mortgages, the qualifying interest rate is used if it is higher than the contract rate. For 5 year terms and longer, the qualifying rate is the contract rate ie the rate your lender is offering you.

For instance the qualifying rate today (April 26, 2013) is 5.14%.  The contract rate for 5 year fixed terms can range between 2.79% and 3.09% depending on credit etc. So if you are choosing a 5 year fixed term, you are qualifying at the rate within the above range. If you are choosing a shorter term or a variable mortgage, you are qualifying at 5.14%. This can make a big difference in the amount you qualify for.

Your actual payments are based on your contract rate, not the higher qualifying rate.

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