# Benchmark Rate Consultation - Frequently Asked Questions

• OSFI’s guideline B-20 sets the minimum qualifying rate for uninsured mortgages. It is the greater of the contractual mortgage rate plus two percent or the five-year benchmark rate published by the Bank of Canada.
• The current benchmark rate (five-year conventional mortgage rate) is published weekly by the Bank of Canada in Series V80691335.
1. What is the purpose of the minimum qualifying rate in guideline B-20?
• Guideline B-20 stresses the importance of prudently assessing the borrower's capacity to repay their loans (uninsured mortgage).
• The minimum qualifying rate serves as a buffer for a range of possible adverse scenarios, e.g. income loss, increased interest rates, or additional expenses.
2. How is the minimum qualifying rate used?
• Lenders use debt serviceability ratios, e.g. Gross Debt Service and Total Debt Service, to assess a borrower’s capacity to repay their mortgage. The minimum qualifying rate is an input into these calculations.
• Example 1: Mary’s bank offers her a rate of 2.99% for an uninsured mortgage. Since the current benchmark rate of 5.19% is greater than the contract rate of 2.99% + 2%, the benchmark rate applies. Mary’s bank will use 5.19% to calculate her debt serviceability ratios.
• Example 2: John’s bank offers him a rate of 3.65% for an uninsured mortgage. Since the contract rate of 3.65% + 2% is greater than the current benchmark rate of 5.19%, the contract rate + 2% applies. John’s bank will use 5.65% to calculate his debt serviceability ratios.
3. What is the objective of including a benchmark rate in the formula for uninsured mortgages?
• The benchmark rate establishes a floor for all borrowers, regardless of the contract rate and product type.
• In the examples in Question 2, the benchmark rate establishes the lowest possible value that can be used for the minimum qualifying rate in the calculation of the debt serviceability ratios. Even if John and Mary are able to negotiate better rates, their banks will not use a rate lower than 5.19% in their calculations.
4. How is the current benchmark rate calculated?
• The current benchmark rate is the most typical posted rate for five-year conventional mortgages of those offered by the six major chartered banks. The methodology for calculating the typical rate is based on the statistical mode of the rates posted by the six largest banks.
• Further details on this calculation are on the Bank of Canada’s website.
5. Why is the consultation limited to the proposed new benchmark rate instead of reviewing the minimum qualifying rate for uninsured mortgages more broadly?
• OSFI’s guideline B-20 and the minimum qualifying rate for uninsured mortgages remain relevant and effective throughout the economic cycle.
• OSFI remains confident that the minimum qualifying rate, including the 2% buffer on the contract rate, is reasonable and prudent for uninsured mortgages given the potential for sudden changes in borrower circumstances, e.g. income loss, increased interest rates, or additional expenses.
• This buffer is prudent in all regions of the country and will remain a key part of guideline B-20.
6. Why is OSFI proposing a new benchmark rate?
• The current benchmark rate has traditionally been about 200 basis points (or two percent) higher than actual five-year contract rates for residential mortgages. For this reason, OSFI viewed the current benchmark rate as a conservative floor for the assessment of a borrower’s capacity to repay their loans. However, OSFI has observed that these rates are no longer moving in line with average contract rates. The gap has widened to exceed two percent on a sustained basis, suggesting a less responsive floor than originally intended.
• The proposed new benchmark is based on rates from mortgage applications submitted by a wide variety of lenders, which makes it more representative of both the broader market and fluctuations in actual contract rates. In addition to introducing a more accurate floor, OSFI’s proposal also maintains cohesion between the benchmark rates used to qualify both uninsured and insured mortgages.
• OSFI will communicate amendments to the benchmark rate by April 1, with changes effective on April 6.
7. How will the new proposed benchmark be calculated?
• OSFI is proposing to adopt the same rate that will be used in determining the minimum qualifying rate for insured mortgages, effective April 6, 2020. The new benchmark rate is the weekly median five-year fixed insured mortgage rate from mortgage insurance applications adjudicated by federally-backed mortgage insurers, plus a buffer of 200 basis points.
• The Bank of Canada will calculate the new benchmark rate to two decimal places using actual application rates submitted by all lenders to mortgage insurers during a seven-day reference period. Application rates are generally consistent with final mortgage contract rates and allow for more timely publication, i.e. within two weeks of the end of the reference period.
• The Bank of Canada will publish the new benchmark rate every Wednesday, with the rate coming into effect the following Monday. If, on any given week, there are any delays in updating the new benchmark rate, the previous week’s published rate will stand until a new rate is published.
8. How does the minimum qualifying rate for uninsured mortgages compare to the one for insured mortgages? Why are they different?
• The Minister of Finance sets the minimum qualifying rate for insured mortgages. It is currently the greater of the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate. Note - The Minister of Finance announced that the current benchmark rate used in its minimum qualifying rate will be replaced by a new benchmark rate, effective April 6, 2020.
• The Superintendent sets the minimum qualifying rate for uninsured mortgages. It is the greater of the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate plus two percent.
• The buffer of two percent over the contract rate is intended to ensure a sufficient level of conservatism in assessing affordability for uninsured mortgages, which may have borrower and loan characteristics that are riskier than for insured mortgages.
9. How has the minimum qualifying rate for uninsured mortgages evolved?
• OSFI introduced the minimum qualifying rate when it first issued guideline B-20 in 2012. At that time, it was the greater of the contract rate or the current benchmark rate. OSFI required lenders to apply a qualifying rate to all uninsured variable rate and fixed term mortgages, less than five-years.
• OSFI revised the formula for uninsured mortgages in 2017 to add two percent to the contract rate as a buffer for possible changing circumstances, such as, income loss, unexpected expenses, or increasing interest rates. It also expanded application to all uninsured mortgages to be consistent with the rules for insured mortgages (which were amended in 2016).
10. Has OSFI previously consulted on the minimum qualifying rate?
• OSFI issued a draft guideline for public consultation in 2017, which proposed eliminating the benchmark rate and setting the minimum qualifying rate equal to the contract rate plus two percent.
• Many respondents supported the concept of a qualifying rate that would prudently assess borrowers’ capacity to repay their loans. Some respondents raised concerns about the timing, form and calibration of the minimum qualifying rate.
• After considering the input received, OSFI adjusted the minimum qualifying rate to include the current benchmark rate. The adjusted approach provided a floor intended to dampen the incentives to take variable or shorter-term fixed-rate mortgages. Application of the minimum qualifying rate in the final guideline also enabled access to portfolio insurance, subject to mortgage insurers’ requirements and approvals.
• A summary of the consultation comments and OSFI’s responses are in the cover letter that accompanied the release of guideline B-20.