I’m sure you’ve heard the term “mortgage stress test”, but if you’re early in your real estate buying journey, or haven’t made a move in a long time, the rules and regulations may not be clear to you. As of June 2021, the mortgage stress test rules state that borrowers must qualify for a mortgage amount, based on either;
· the rate they were approved for by their lender plus 2%,
· or 5.25% (the minimum qualifying rate), whichever is higher.
· As an example, if you’re approved for a mortgage at an interest rate of 3%, you’ll have to prove that you can also be approved for a mortgage with a 5.25% rate. If you’re approved for a mortgage at an interest rate of 4%, you’ll need to prove you can also be approved for a mortgage with a 6% rate.
Who needs to take the mortgage stress test?
The mortgage stress test applies if you are - a) Purchasing a home b) Refinancing c) Changing mortgage lenders d) Taking out a second mortgage, or e) Applying for a home equity line of credit. However, if you are simply renewing your mortgage with the same lender, you won’t need to pass the stress test.
Why was the mortgage stress-test implemented?
The mortgage stress test was introduced to address concerns about the rising amount of mortgage debt consumers were taking on in Canada, posing a potential risk to the country’s overall economic stability. The stress test helps determine if borrowers will be able to afford their mortgages, even if interest rates rise. It may also slow the rise of home prices by limiting how much buyers can qualify for a mortgage.
What does the mortgage stress test mean for first-time homebuyers?
First-time homebuyers tend to have smaller down payments, as they haven't had the opportunity to build up equity in a previous house. They only have what they've saved or are gifted. The smaller the down payment, the bigger the mortgage needed, and the bigger the qualifying payment.
Mortgage Stress Test Calculator
If you want to get a better understanding of what you may qualify for, try the mortgage stress test calculator from the Government of Canada. Simply add in some property details and projected expenses and it will calculate an approximate approval amount.
What happens if you don't pass the mortgage stress test?
If you didn't qualify for a mortgage for the amount you wanted to borrow after the stress test, here is what you can do:
• Increase your down payment
• Improve your credit
• Shop for a more budget-friendly home
• Increase your monthly cashflow
Do you have further questions about the mortgage stress test? For all of your questions and mortgage needs, do not hesitate to connect with me, I’d love to help you navigate your financial needs during your home buying journey!
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