Understanding The New Mortgage Stress Test Rules

new mortgage stress test rules

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

understanding the stress test

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%.

Qualifying

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

stress test qualifying rate

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

new home buyers

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.

Calculate your mortgage stress test here.

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

For any questions or concerns regarding the new mortgage stress test or anything mortgage and loan-related, contact us today at (403) 571-8142. We are ready to help you open the next chapter of your life. We will work with you to get you into a home, even with the more difficult stress test in place.

Knowing Your Options For A Home Equity Line Of Credit (HELOC)

Home equity line of credit

When it comes to understanding how to consolidate your debt, knowing all of your options is a good start. Many Canadians struggle with debt, be it credit card, car payments, student loans, and especially mortgage payments. We understand how difficult it can be to manage all of this all while taking care of yourself and your family.

Restructuring

credit debt

The first step in understanding how to get back on track by organizing your life to make your debt payments manageable. For this a mortgage advisor is the best place to start. If the option is right for you, they can help you obtain your home equity in order to help pay off your debt. They can also help you restructure your spending habits to make sure you can stay out of debt and make your home equity line of credit (HELOC) count.

Your HELOC will still need to be repaid; however, when you are only paying one payment, with one interest rate, it can drastically reduce stress. Causing things to be less overwhelming, not having multiple bill payments with various interest rates coming in.

What is a Home Equity Line of Credit (HELOC)?

  • Maximum loan-to-value (LTV) = 65% of appraised value
  • It is a line of credit secured by way of a collateral mortgage on the title to your home/property. The interest rate is set by the Prime Rate and is much lower than a personal unsecured line of credit. Maximum Loan-to-Value (LTV) is 65% of appraised value.

Determining Your Equity

Your home Equity is based on the difference between your home’s value and the unpaid balance of your existing mortgage. Home equity has the potential to raise in worth by one of two ways, either you pay your mortgage down and the difference grows, or the value of your home increases.

A stand-alone HELOC has a maximum Loan-to-Value (LTV) of 65%, and a mortgage has a maximum LTV of 80%. You can have a mortgage and HELOC under one charge on a title, going to an LTV of 80%. Just remember, you will need to subtract the amount still owing on your mortgage!

How to Qualify For a Home Equity Line Of Credit

HELOC key

According to the Financial Consumer Agency of Canada, in order to qualify for a home equity line of credit you will require:

A minimum down payment or equity of 35% if you want to use a stand-alone home equity line of credit as a substitute for your mortgage.

Lender Requirements

Your lender will have requirements before you can be approved for a home equity line of credit which include:

  •  A Satisfactory Credit Score
  • Proof Of An Appropriate & Stable Income
  • A Suitable Level Of Debt Compared To Your Income

In order to qualify for a Home Equity Line Of Credit, you will need to pass a stress test. This is to ensure that you can afford payments at a higher rate than the rate of your contact to avoid problems if rates increase. The lender wants to be sure you can pay it off.

Rates

HELOC’s are not necessarily subject to the same rate fluctuations as mortgages. HELOC’s are always set with a prime, which means that they fluctuate, but your mortgage can either have a fixed or variable rate.

Potential Benefits Of A HELOC:

Mortgage relief

One of the main benefits of debt consolidation is that it will buy you time and emotional release from current debt pressures. Studies have shown that the stress of too much debt can impact more than your mental health, and it can also be affecting other parts of your life.

HELOC Requirements:

  • Minimum Payments Required = Interest Only. Can Be Paid In Full At Anytime With No Penalties.
  • Readvanceable – The HELOC Can Be Paid In Full & Used Again At
  • Anytime As Needed- Maximum Flexibility
  • Low Interest Rate

A HELOC only has a minimum payment requirement of the interest and will allow you to address your budget and free up your cash flow before making principal payments. By refinancing and being serious about making and keeping to your budget, you can achieve a debt-free lifestyle! While refinancing can extend your mortgage’s life, it can get you onto the path of being debt-free a lot sooner.

home equity, money in your pocket

For more information on a home equity line of credit (HELOC), talk to a mortgage professional. They can help way your options to determine the best course of action for getting your bills and various payments under control with a HELOC. Here at The Mortgage Group, we are here to help you with all of your mortgage questions and concerns. Including, those regarding home equity. Contact us today to better understand how we can help you obtain your home equity line of credit.

How The Bank Of Canada Interest Rates Affect You

Bank Of Canada Interest Rates

What Overnight Interest Rates Mean To Mortgage Holders

Often on the news, you will hear the announcement that the Bank of Canada raised, lowered, or held its overnight interest rate. Many people don’t pay much attention to these. However, monitoring the changes will protect your finances in the long term.

Does The Bank Of Canada Overnight Rate Affect Your Mortgage?

The answer to that question is yes and no. The Bank of Canada is the place Canadian banks go to for mortgage lending money that they, in turn, lend to Canadians.

The announcements of overnight interest rate changes mean your bank will look at the rates they are charged. The rate changes will impact how they divert them onto what you are paying on your home mortgage interest rates. 

Most mortgages state prime plus a certain percentage in the contract for the money borrowed. Similarly, home equity credit lines taken on your home will also state credit line interest rates of prime plus rates.

Announcements of a .25% change do not seem significant. Still, if you look at that quarter percent change over a 25-year amortization, it can add or subtract thousands of dollars to the overall mortgage. 

It can also mean an increase or decrease to your home mortgage payment of about $300. Most of the time, a rise in the overnight rate of .25%, means there will be several more quarter percent raises in the future.

Home mortgage types have a different impact on changes to the overnight rates. If you have a variable mortgage or open homeowner’s mortgage, your interest rate floats. It can also frequently change with rate changes. If you have a closed, fixed homeowner’s mortgage rate, the rate changes will not affect you as much. Which means you don’t need to worry until your mortgage renewal rate is up. If the interest rates have increased significantly, homeowners may have trouble qualifying unless they plan for unanticipated changes to their mortgage.

Protect Yourself From Mortgage Rate Increases

Here are some ways to protect your home and family should interest rates climb:

  • Pay attention to Bank of Canada announcements
  • Talk with your private mortgage broker or bank lender about options should rates increase
  • Make a balanced budget that includes a buffer for rising expenses
  • Create a savings plan
  • Keep credit purchases low and pay them off each month
  • Re-evaluate your spending habits and find ways to increase income
  • Lock into a fixed mortgage should interest rates jump significantly 

The Bank of Canada reviews interest rates eight times a year. If there is a rate change each time, that could mean a change of two percent each year. A two percent increase will have a significant impact on your mortgage payments. With each review, the Bank of Canada Board issues statements to keep Canadians informed. This allows them to watch trends develop over the year.

How The Bank Of Canada Sets Overnight Rates

Most of us don’t know much about the process the Bank of Canada uses to decide how much rates change. It is run by an independent board of directors appointed by the Minister of Finance. There is a Governor, a Senior Deputy Governor and 12 directors on the board. 

The goal of the board is to promote the financial and economic welfare of  Canadians. The Bank Of Canada makes all decisions by monitoring the international and Canadian markets. Additionally, they watch the monetary transfers that occur in the world daily. They consider the productivity of Canadians and job employment rates, the cost of living index, and Canadians debt load figures. 

The exchange rates of the Canadian dollar compared to other countries are also monitored. Canada’s primary trading partner is the United States. Therefore, the value of money is often linked with their bank rates and money value. There may also be changes in the future when global trading partners from Europe and Asia increase.

The statement released with the announcement of an overnight change reflects the directors’ perspective on Canadian finances.

“Economic forecasts have been marked down further in most countries, largely as a consequence of the escalation of trade actions and uncertainty around what may be next,” said Bank of Canada Governor Stephen Poloz in his Oct. 30, 2019 rate announcement

In that announcement, the rate stayed the same at 1.75%. 

If you want to know more about how interest rates affect mortgages, give us a call. Our team of professional mortgage brokers at The Mortgage Group Calgary can help. We will explain in a way you can understand how to get the best interest rates for your home mortgage and home equity credit line.