10 Sep 2015

Qualifying Purchase Price – Why I’m Now Giving My Clients Two Price Points

Qualifying Purchase Price – Why I’m Now Giving My Clients Two Price PointsBack in June 2012 OSFI (Office of the Superintendent of Financial Institutions) rolled out their B-20 Residential Mortgage Underwriting Practices and Procedures, in an effort to force banks and lenders to follow more prudent underwriting guidelines.

One of the most impactful changes was imposed on borrowers who want to take a Variable rate, or a term of less than 5 years. Prior to the B-20, we were able to qualify clients for these types of products using a 3-year discounted rate. To put that in perspective, current 5-year rates are between 2.99% and 3.09%, whereas 3-year discounted rates are between 2.49% and 2.79%. Now, the B-20 mandates the following:

If a client is taking a 5-year fixed rate product, we are able to qualify them using the contractual rate (ie, the discounted rate that their mortgage will be based on) and, as mentioned above, those discounted 5-year rates are currently available between 2.99% and 3.09%.

However, if a client wants a Variable rate, or a term less than 5 years in length, we are forced to qualify them using the Bank of Canada’s posted rate, which is currently 4.79%. What this does is increases the qualifying payment, and since approvals are essentially based on an income-to-debt ratio, said clients will essentially qualify for a lesser purchase price if they want one of these products.

Now, just to curb any confusion, the qualifying rate is not the rate these clients are actually paying. The contractual rate for Variable rates is currently between 2.40% and 2.50% and 2, 3, and 4 year fixed rates range between 2.49% and 2.99%. The purpose of using the Bank of Canada’s posted rate to qualify for these products is simply to prove that these particular clients could potentially handle their mortgage at a higher rate. In the event that rates eventually increase, OSFI feels more comfortable knowing that these clients will still be able to afford making their mortgage payments as they have qualified at a rate as high as 4.79%.

And thus the reason that when clients ask me what they qualify for, I am now having to give them two different price points. One price point that they qualify for on a 5-year fixed product, and a second, lower price point, that they qualify for if they want all of their product options available to them.

Jeff Ingram

Jeff Ingram

Dominion Lending Centres - Accredited Mortgage Professional
Jeff is part of DLC Canadian Mortgage Experts based in Surrey, BC.

More Posts - Website

Follow Me:
TwitterFacebookLinkedIn

  • Residential Mortgages

    The purchase of a home is the largest purchase most people make during their lifetime. At Dominion Lending Centres, we want to make each and every purchaser aware of the many mortgage options available to them prior to their purchase and closing date.
    Learn More
  • Commercial Mortgages

    Dominion Lending Centres Commercial has established excellent relationships in the lending community with pension funds, banks, credit unions, life insurance companies, trust companies, private institutions and individual investors.
    Learn More