All your mortgage stress test questions, answered
It's more than a test, it is a definitive moment for your mortgage.
If you are planning on buying a home, you have heard about the new mortgage stress test. Even though it’s been seven months since it took over Canada, you probably still have some questions about it. And we are here to answer every single one of them.
What is the new mortgage stress test?
As a future homeowner, you might be asking yourself “how much mortgage can I afford?” Well, the Office of the Superintendent of Financial Institutions Canada (OSFI) is asking the same thing.
All the way back in October 2017, OSFI announced new guidelines for aspiring homeowners and they officially took effect in January 2018. They want federally regulated mortgage lenders to be more careful with borrowers.
You think you are ready to become a homeowner, but your finances can give the government another sign. The new stress-test will determine if you (and your finances) are actually ready. OSFI just wants to make sure you don’t drown in debt and can afford what you are asking for.
The test is described as strict, but this doesn’t mean you will never get a mortgage. The criteria are just tougher now. And yes, it is mandatory. No way to avoid this one.
Who needs to be tested?
Under the new rules, everyone is tested regardless of how much down payment you put down. Even those renewing their mortgage with a different lender must go through with it.
How do I qualify for a mortgage?
To qualify for a mortgage, lenders will put your financial situation through the worst conditions and see if it still comes back intact or at least alive. They must test if you can afford the five-year benchmark rate of the Bank of Canada or 2 more percentage points in your current interest rate.
OSFI wants to ensure you can afford your mortgage if interest rates increase and if your financial situation goes downhill.
Note: New mortgage stress test rules will come into effect on April 6, 2020. Here's what you need to know.
How has it affected Canadians?
According to the Canadian Real Estate Association (CREA), the stress-test did have some effect. Activity decreased in January and just until now activity started to pick up again. “This year’s new stress-test on mortgage applicants has been weighing on homes sales activity; however, the increase in June suggests its impact may be starting to lift. The extent to which the stress-test continues to sideline home buyers varies by housing market and price range”, says Bark Sukkau, CREA President.
How does it affect me?
Despite the concerns of a few, real estate is still one the best investments you will ever make. We are not here to discourage you about home buying. It is worth it if you are smart about it. The mortgage stress test will only affect you if you don’t work out your budget.
Crunch the numbers on your monthly costs in advance. A rule of thumb is that your monthly payments should be able to endure a rise of 2% in your interest rate. If they pass this rule, be confident you will pass the test.
There are some other options on the table. Wait and save money, or lower your expectations and budget. A smaller mortgage or a longer amortization period can also increase your chances. The important thing is to stay away from risky lenders when looking at other alternatives.
The new mortgage stress test doesn’t have to be nerve-racking. When you search for your home, use the mortgage calculator on each property to work out your budget!