The new mortgage stress test rules are now in effect for Canada as of June 1, 2021. With the mortgage rates so low during the Covid-19 pandemic, the government thought it would be useful to reinforce the protocol for the stress test.
They want to ensure new homebuyers can handle payments with the increase in cost if the mortgage rates rose significantly during their next renewal. It is a way for preparing for the worst-case scenario to be sure that you won’t get caught off guard and end up losing your home and investment.
What Is A Stress Test?
A mortgage stress is used to determine whether you can actually afford your mortgage at a qualifying rate. When people sink their money into a huge investment such as a home, it can stretch budgets thin. Leaving little room for the unknown when it comes to their finances.
The stress test demonstrates a hypothetical bad scenario for the buyer before they make a considerable investment. It uses variables such as losing your job, income reduction, rising interest rates, etc. It’s a way to determine how much you could still afford to pay if any of these situations occurred.
The Stress Test Formula
It’s regardless of your down payment. Lenders will now use the greater of, the Bank of Canada’s 5-year benchmark rate or the contract rate plus 2%.
In order to qualify for a mortgage in Canada, you will need to pass this stress test. However, private lenders, mortgage investment corporations, and other alternative lenders don’t need to abide by the stress test. Though, you’ll still need to prove your creditworthiness and have a stable income that shows you can afford what you’re looking to qualify for.
When & Why Was The Stress Test Implemented In Canada?
Canada implemented the stress test due to growing concerns that the mortgage industry was increasing too quickly. They didn’t want Canada’s overall economic stability to be at risk. So, in 2018 the mortgage stress test came into effect when the federal bank regulator, the Superintendent of Financial Institutions (OFSI), decided it would be wise to create regulations that would ensure Canadians would only spend within their means.
New Stress Test Rules
So, what are the new stress test rules, and how can you prepare for them as a new homebuyer at this time?
The stress test’s new guidelines are more challenging than before, but that is to ensure those applying for a mortgage will be able to continue making payments in this new hot market without struggle.
New Benchmark Minimum Qualifying Rate
The Bank of Canada’s new benchmark minimum qualifying rate for uninsured mortgages is at 5.25%, up from 4.79%. This means the increase in housing sales in Canada’s market will hopefully start to cool off. It takes the heat off cities in Canada where bidding wars, skyrocketing prices and a burst of sales were standard throughout the pandemic.
However, this new rate could make it much harder for new homebuyers to acquire a mortgage and get the ball rolling on a home investment. Still, they say it will help guarantee the Canadian economy stays stable.
Preparing For The Harder Rules & Your New Home Purchase
This increase in the qualifying rate isn’t enough to completely shut would-be homebuyers out of the market. It won’t increase costs but limit what some are allowed to borrow, which could be a strain on some folks.
For example, if the maximum mortgage you were approved for was calculated at $500,000, you’ll presently get approval for $480,000. Meaning, now you’ll need an extra $20,000 to make up the difference. So prepare to save a little more if you want to acquire the same loan.
Don’t let the new rules stop you. There is still plenty you can do to get into a home of your own.
Other Things You Can Do:
- Continue Saving & Work Hard
- Opt for a smaller starter home that fits within the new guidelines
- Work on increasing your credit score. The best mortgage rates go to those with the highest credit scores
- Reach Out To One Of Our Professional Mortgage Brokers With Any Questions About Financing, Mortgages & Affordability