Mortgage Stress Test: Everything You Need To Know About It
Wednesday Aug 11th, 2021
The new mortgage stress test rules are out. With these rules, it will be more difficult for new and renewing mortgage borrowers to be eligible for their home loan commencing June 1st, 2021. The “stress test” now looks at a higher threshold.
The Introduction to Stress Test
A mortgage stress test was introduced in 2018 for all Canadian homebuyers. This catered to validating whether they can make a down payment of 20% or more on a home. Additionally, new mortgage stress test rules ensure that Canadians can afford their mortgages if interest rates rise. For those looking to buy a home, applying and qualifying for a mortgage can be difficult.
New mortgage stress test rules were introduced on June 1st, 2021, by the Office of the Superintendent of Financial Institutions (OSFI) and the Department of Finance, which will affect homebuyers and owners. If you plan to buy a home in the coming months, you should be aware of the new mortgage stress test. You must pass the stress test to apply for a bank mortgage.
What is a Stress Test?
A mortgage stress test can help you figure how much you can afford and under what conditions. Could you still make your mortgage payments if you lose your job, for instance? It will ensure that, even if interest rates rise in the future, Canadian home buyers can afford the monthly payment of the mortgage. Vancouver and Toronto are among the top ten most expensive cities in the world for housing. Thus, homebuyers must understand whether they will be able to pay their mortgage if interest rate levels continue to rise.
Since 2018, all Canadian home buyers applying for a high-ratio mortgage have to undergo the stress test. Further, the government has applied it to all mortgages. The bank provides you an interest rate depending on the credit score when you apply for a mortgage. However, the interest rate you receive is not the rate that the bank will use to determine whether you are eligible for a mortgage. Instead, you'll need to qualify for a loan with a much higher interest rate. This confirms that you can keep up with your payments if they rise.
June 2021 – New Changes
All insured and uninsured mortgages should be approved at a higher qualifying rate. This started on June 1st, 2021 under the new mortgage stress test rules. Uninsured mortgages with a down payment of at least 20%, and insured mortgages with a down payment of less than 20%, will be required to qualify for 5.25 percent or two percent more than the present rate, whichever is higher. In addition, the minimum qualifying rate has risen to 5.25 percent from 4.79 percent.
This means you should have sufficient income. Also, you should manage your debt to qualify for a mortgage at a higher rate. With this effect, homebuyers will borrow a smaller percentage of money from the bank.
For example, if a buyer wants to buy a $400,000 home with a down payment of $100,000, they would need to pay the mortgage amount as $300,000. With a 2% interest rate and a 25-year loan, the buyer would pay $1,270 per month. Under the new rules, the application for the mortgage would be tested as 5.25%. At that rate, the loan would be $1,788 per month for the buyer.
The average home price in Canada has increased by 31% ever since last year, making everyone worried. One possible solution is to deflate the market by making it more challenging to enter. Buyers will now have to prove that they can make mortgage payments at a much higher interest rate under the new stress test conditions. This stands regardless of how low their exact mortgage rate is. It lowers your purchasing power, especially for first-time homebuyers.
What does this mean for homebuyers?
The new stress test will significantly impact first-time homebuyers than others. That is because they do not yet have any equity in their home to use as a down payment. If you have already taken out a loan, you'll have to go through the new mortgage stress test. That also includes refinancing or renewing your mortgage.
If you want to buy a house, the new mortgage rules will directly impact how much money you can borrow. You must demonstrate that you can make your monthly mortgage payments even if interest rates rise in the future. The new mortgage stress test in Canada affects first-time homebuyers and homeowners who are about to renew their mortgages. Also, homeowners who want to renew their mortgages or switch lenders will have to take a stress test.
The new mortgage stress test rules should hopefully help calm down the real estate market, which currently experiences unprecedented growth. The interest rates have gone down to historic lows due to the pandemic. However, it does not guarantee that they will remain so in the long run. This additional stress test will safeguard buyers who may struggle to repay their mortgage if interest rates rise in the future, in addition to lowering demand. If you plan on buying a house in Toronto, use our mortgage calculator to figure out how much you can afford.
If you decide to invest in a property in Toronto or have any queries relating to the Stress Test, feel free to reach the Toronto Condo Team. Our team will assist you with any of your queries.