- if you are taking a 5 year fixed rate mortgage, or longer fixed rate mortgage, then we can use the rate you are actually getting to calculate your payment on your application.
- if you are taking a fixed rate term of *less* than 5 years OR if you are taking a variable rate mortgage, then lenders will use the benchmark rate to calculate your mortgage payment on the application. So even if you got a 3 year term, or a variable rate that is lower than what a 5 year rate would be, the amount used to qualify you on the application would be higher, so you end up qualifying for less.
Clear as mud? 🙂
Now for the *why* part. This rule was put in to place to help make sure people aren’t buying something they can’t afford if rates were higher. With a shorter term, or with a variable rate, the rate has the potential to increase in a shorter time frame than if it’s guaranteed to stay the same for 5 years or longer. In order make sure that people can afford a higher payment if their rate goes up in the short term, the benchmark rate (aka qualifying rate) is used to lower the amount that people spend and keep payments manageable in the future.