April 29, 2015   Robert McLister  

One never stops learning in this business. The latest object lesson for us relates to the Benchmark Qualifying Rate, which is used to qualify variable- and 1- to 4-year fixed rate borrowers.

The Bank of Canada (BoC) explained how it was calculated back in 2010 (that story). But a few weeks ago the Benchmark rate inexplicably dropped from 4.74% to 4.64%.

The Benchmark, which is published every Thursday before noon, is supposed to be a mode average of the Big 6 banks’ posted 5-year fixed rates. Those rates are currently 4.49%, 4.64%, 4.64%, 4.74%, 4.74% and 4.79%.

A mode average measures the most frequent number(s). So given the dual modes in the above rates, and the fact that there can be only one Benchmark rate, one might expect the result to be 4.69% (an average of the two modes 4.64% and 4.74%). Instead, the BoC set the Benchmark at 4.64%.

Since the entire mortgage industry relies on this number, it seemed productive to ask why. Here’s what we found.

When there are multiple modes, “we do not always choose the lowest of the modes,” a BoC spokesperson told us. But “unfortunately, we cannot disclose the exact set of rules the Bank uses to calculate the typical rate.”

Okie dokie then. Scratch the idea of explaining it to clients and educating the industry.

“…The Bank cannot share the formula for how the rate is calculated because some of the guidelines are linked to certain data that we purchase and for which we have a confidentiality agreement with the provider.”

What data must be purchased is somewhat of a mystery. All the data the BoC needs for this calculation are directly on six bank websites.

Given the esoteric nature of this all, most are content to not question the Bank’s calculation. To us, it’s more the secrecy of it all that tickles our curiosity. Then again, if next time the BoC uses the higher of two modes, and that causes your mortgage application to be declined due to above-limit debt ratios, this obscure little calculation may hit closer to home.