July 13th Bank of Canada Announcement

The Bank of Canada has increased the overnight rate by a whopping 1%, which means the chartered banks will most likely raise their Prime Rate to 4.70% by this time tomorrow. 

The main fallout is how this affects housing affordability and the mortgage qualification stress test:

The current Mortgage Qualifying Rate (MQR) is 5.25%, which is now totally meaningless

Every single mortgage we approve from today onwards will qualify at its contract rate plus 2%, regardless of fixed or variable.

Hi-ratio variable rate mortgages run at Prime less 0.7% or so, and those with a down payment of at least 20% run at Prime less 0.3%.

So tomorrow, your variable rate mortgage interest rate will be 4% to 4.4%.

The stress test rate for your VRM will be 2% higher, anywhere from 6% to 6.4%.

This most recent bump to the Prime Rate has lessened the disparity gap between variable and fixed-rate mortgages.

Today’s fixed rate mortgages’ stress test rate is around 6.99% to 7.49%.

You will still qualify for a larger mortgage at a lower rate if you choose a variable over fixed, but the gap has shrunk due to the 1% increase announced today.

We will have to wait to see how OSFI will respond and bridge the gap in mortgage qualifying rates. Currently, OSFI meets every December to discuss the stress test and any changes, but with more rate hikes coming, this meeting should perhaps be expedited.