5-year conventional mortgage qualification rate falls to May 2018 levels

The 5-year conventional mortgage rate has fallen to 5.19 percent this week, after spending over a year at 5.34 percent. The rate is significant in the Canadian mortgage market as it is used to stress-test home buyers during mortgage qualification, for those applying for an insured debt product, and those with a down payment of less than 20 percent. This helps identify whether or not consumers can withstand a potential interest rate increase on their debt.

Last week, the Bank of Canada decided to keep its key overnight interest rate benchmark unchanged at 1.75 percent, but this week the bank decided to revise the mortgage qualification rate downward. Above average mortgage renewals over the last 18 months, and a slowing down in mortgage origination that has not been seen in a quarter of a century may be prompting regulators and banks to seek lower 5-year conventional rates.

When comparing the Teranet-National Bank home price index to the 5-year rate over the last 10 years, lower interest rates seem to correlate with higher home prices. When rates began lifting from the interest rate floor established at 4.64 percent in July 2017, due to the introduction of a cocktail of new rules for home buyers, prices began to enter consolidation. 

This data suggests that credit allocation and origination restrictions aimed toward high-ratio mortgage borrows, or those with debt-to-income ratios above 400 percent, were likely the initial trigger on the real estate market. Rule tightening had a significant impact on both of the shares of high-ratio mortgages, which incurred a 50 percent drop before higher 5-year mortgage rates set in. This impacted total mortgage origination and, subsequently, lower-ratio mortgages when a higher 5-year rate came into effect.