Canada’s Benchmark Rate
What is the benchmark rate?
We hear a lot about mortgage rates. Canada’s benchmark rate is a rate that lenders are required to use to qualify mortgage borrowers in Canada. Those borrowers want a variable rate mortgage or a mortgage term of fewer than 5 years.
The benchmark rate made headlines in the early part of 2010 when the Government of Canada announced new rules for lending money and qualifying for mortgage loans. These rules were put in place due to perceived volatility in the market, and the government’s desire decrease that amount of volatility.
The feds felt this benchmark rate should be based on the consistently higher Bank of Canada conventional five-year rate. This rate was meant to represent a cross-section of posted bank rates.
The conventional five-year rate and posted bank rates are much higher than rates that can be available through a mortgage broker in Canada. Typically, Canada’s benchmark rate is around 1.50% higher than a mortgage broker’s best rates.
Why are they doing this to us?
A History on Benchmarks
A History on Benchmarks
The term benchmark probably originated from the chiseled horizontal marks that British ordnance surveyors made in stone structures. They were used as a reference point for the calculation of heights and altitudes. The use of benchmarks goes back hundreds of years. Although many have now disappeared, you can still find some today mainly on old churches and bridges throughout Britain.
A qualifying benchmark rate is to ensure that those who qualify for a mortgage in Canada can qualify with breathing room. There is always the chance for a downturn or increase in rates. This prevents Canadians from becoming orphaned homeowners without a lender willing to assist them.
This has happened in the past where a borrower becomes over leveraged. Not only that, they own a home that they barely qualified for. Having a variable rate is good for just this reason. If the rates start to climb, a maxed out borrower will not be able to afford the payments.
This is based on a conversion from variable to a much higher fixed rate mortgage. Additionally, this can result in being left with a negative amortization. This is a very bad thing.
The benchmark rate forces people to qualify at a much higher rate. This is to prove that even in the event of a substantial mortgage rate increase, they can handle that mortgage loan.
Why the need for Canada’s Benchmark Rates?
Benchmark rates, in the long run, will help to create stability in the mortgage market in Canada. Also, this is while making sure that there is not a bubble that is created in the meantime.
Although mortgage rates in Canada are still very low, it is a mistake to borrow more money than you can comfortably repay. The benchmark rate keeps the Canadian housing market in check.
Sourcing the best rates in Canada is still very possible. Moreover, the benchmark rate and the new rules do not change the availability or value of these best rates in Canada.