After six long months of no changes to the big banks’ posted rates, TD Bank broke the ice on Tuesday by lowering its 5-year posted rate to 4.99% from 5.34%.
While the big banks adjust their “special” rates regularly (as RBC did last week), changes to their higher posted rates are more rare. And the move is important because it means other banks are likely to follow, and if enough do, it will lead to a drop in the 5-year benchmark qualifying rate…i.e. the stress test rate.
That would be welcome news to the countless mortgage shoppers out there who are struggling to qualify at the current benchmark rate of 5.19%.
“Based on current market conditions, lower funding costs have led to a growing variance in customer rates versus posted rates,” a TD spokesperson told BNN Bloomberg. “This rate decrease aligns TD’s 5-year fixed posted rate more closely with current customer rates.”
And that’s all true. Bond yields—which lead fixed mortgage rates—have plummeted roughly 30 basis points since the start of the year. And the big banks keeping their posted rates artificially higher (in TD’s case, it hasn’t cut its 5-year posted rate since March 2019), has started to draw attention from key industry players.
The OSFI Effect
TD’s rate drop suspiciously comes just days after a speech from Ben Gully, Assistant Superintendent at the Office of the Superintendent of Financial Institutions (OSFI), which regulates federal financial institutions.
In his speech, Gully admitted the use of the benchmark qualifying rate as the floor of Guideline B-20 stress testing for uninsured mortgages is “not playing the role that we intended.”
“For many years, our data showed the difference between the benchmark rate and the average contract rate was about 2%,” Gully said. “However, the difference between the average contract rate and the benchmark has been widening more recently, suggesting that the benchmark is less responsive to market changes than when it was first proposed.”
Some in the industry suspect that speech was the stick that broke the camel’s back and finally pushed the banks (or at least one of them) to adjust their qualifying rate.
Ron Butler of Butler Mortgage said TD’s move “absolutely” was a result of Gully’s comments, and he expects others to follow within the next week.
“We will see a 4.89% qualifying rate in the spring, if not sooner,” he told CMT.
Impact on the Stress Test
Even if the qualifying rate were to drop that much, a 30-bps reduction would still only have a “minimal effect” for buyers struggling to qualify, he said. Anecdotally, Butler estimates about 300 to 400 mortgage applicants he deals with each year have trouble qualifying under the stress test.
A recent survey from Zillow and Ipsos found that half of Canadians (51%) say they are concerned that stricter rules will prevent them from qualifying for a mortgage, up five points since 2018.
If the qualifying rate were to drop to just 4.99%, that would require roughly 1.8% less income in order to qualify for the average Canadian home, according to Rob McLister of RateSpy.com. It would also increase buying power by nearly 2%.
“These effects may seem small at the margin, but they’re magnified when you’re talking about thousands of buyers across Canada,” he wrote. “A lower stress test rate would also help refinancers qualify for bigger loans. Someone with an average home making $100,000 a year would qualify for a $9,000 bigger mortgage (+/-) if the stress test rate dropped to 4.99% from 5.19%.”
The ball is now in the court of the other Big 5 banks to determine what happens to the qualifying rate. You can be sure many prospective homebuyers will be watching closely.
Source: Canadian Mortgage Trends – Steve Huebl February 5, 2020