Effective April 19, 2010, the Canadian Department of Finance implemented some changes on how CMHC insures a mortgage against any defaults.
It clearly stats that the “Canadian Department of Finance require that all borrowers meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term. This initiative will help Canadians prepare for higher interest rates in the future.”
This rate essentially ensures that the borrower has the ability to pay if the interest rate goes up. Unfortunately it also keeps a lot of borrowers at bay.
The qualifying rate is used to calculate a borrowers Gross or Total debt service ratio.
It is the Bank of Canada who looks at the posted rate of the larger Canadian banks every week (Wednesday). Then it calculates a benchmark rate from all those rates.
CMHC then takes this data and calculates the qualifying criteria of the borrowers. (Emili)