Tougher Lending Guidelines If You Choose a Variable Rate Mortgage

By October 29, 2013Mortgage News

The Bank of Canada has recently announced that they are not looking to raise their key lending rate anytime soon, so this may be very good news for those of you who don’t mind the added risk of a variable rate mortgage rather than securing a locked-in fixed rate mortgage. We currently have lenders offering variable rate mortgages as low as Prime minus 0.50% (that’s 2.50%!) while the best 5 year fixed rate is currently at 3.54%. This is an approx. 1.00% spread in the interest rate! That’s the good news.

The “not so” good news is how lenders will qualify you when you are requesting a variable rate mortgage and the impact this may have in the amount you wish to borrow. Let’s take a look at an example.

Scenario 1: Client earns $60,000 annually and has 20% downpayment available towards the purchase of a residence. She has decided to go with a 5 year fixed rate mortgage and would like to know the maximum mortgage she would qualify for.

  • Income = $60,000
  • Maximum GDS (Gross Debt Servicing) available = 39%
  • Interest rate = 3.54%
  • Amortization = 30 years (Assuming a conventional mortgage at 80% loan to value)
  • Maximum Mortgage Payment including taxes+heat = $1,950 ($60,000/12 x 39%)
  • Maximum Mortgage Payment excluding taxes + heat = $1,700 (assuming $250 for taxes/heat)
  • Maximum Mortgage = $377,915

Scenario 2: Same client as above but she has decided to take advantage of a variable rate mortgage instead.

  • Income = $60,000 (same)
  • Maximum GDS = 39% (same)
  • Interest rate = 2.50% (Prime minus 0.50%)
  • Bank’s Qualifying rate = 5.34% (All lenders will qualify using the 5 year Bank of Canada qualifying rate when you choose a variable rate or a lesser term than 5 years)
  • Maximum Mortgage = $306,771

In our example above, the lender has reduced the maximum mortgage amount available by $71,144!!! (just because she is requesting a variable rate instead of a 5 year fixed rate). So if you are considering a variable rate mortgage as an option, it may be in your best interest to go over your financial situation with us (it’s an absolutely free service that we provide to you!) prior to purchasing or refinancing your property. A variable rate mortgage may definitely save you some interest, but it’s still a good idea to see how it applies to your very own situation.