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What Do You Need To Know About The Mortgage Stress Test In Canada?
If you have a mortgage or are looking to own a home anytime soon, you’ve likely heard about the “stress test,” which honestly sounds a little scary. Generally, the stress test uses a fictitious, often higher, interest rate to determine the borrower’s ability to repay the loan with interest if interest rates go up.
The stress testing system is here to stay, and starting from June 1st, 2021, there is a new and enhanced qualifying rate, which is greater than or equal to 5.25% or your approval contract rate with an additional 2%. Before this, the qualifying rate was 4.79%, with a 2% approval contract rate.
Mortgage Stress Test 2.0 Rules
The government is, for the most part, responsible for maintaining an affordable and somewhat safe housing market. Even though prices are running away in the short term, many Canadians have wealth that’s invested in the market, so this was a small test taken to see how the market reacted.
The minor tweak to the stress test represents around a 4% reduction of an individual’s borrowing power. It is a symbolic representation of action, but without triggering a situation that could be catastrophic. In other words, the government is acknowledging and addressing the problem of demand with purposely limited action. While it’s an action many experts applaud, there should also be action on the supply side of the market.
What is This Mortgage Stress Test?
All mortgage applications are put through a stress test by applying a higher interest rate. Usually, the rate is between the new qualifying rate set by the Bank of Canada or by adding 2% to the contractual mortgage rate.
In most cases, it means borrowers will qualify for 4% less money to purchase a home. The only exception is if you currently have a legally binding purchase and sale agreement that predates June 1st, 2021. It may also not apply to anyone renewing their mortgage, which is default insured.
Mortgage Stress Test Math
Now before the new qualification rules were in effect, if you put a 20% or higher down payment on the home and a 25-year amortization, you’d pay around $500 per $100,000 of mortgage debt.
At present, you need to qualify for payments that are $600 per $100,000 worth of mortgage. So, the question is, can you pay the extra $100 a month for every $100k of mortgage debt you apply for?
You can consider this a useful tolerance test, mainly because we’re now living in an economy where mortgage interest rates are most likely going to rise.
Final Words on the Mortgage Stress Test
It is essential that you keep your ears to the ground when it comes to the latest mortgage regulations since they directly impact your mortgage. Beyond that, you can always work on increasing the amount you borrow by making more money and potentially saving for a more substantial down payment.
You might also want to contact a mortgage broker for help with stress testing before applying. The broker should help determine your ideal debt service ratio and inform you of the latest changes to lending policies moving forward.
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