Obtaining a mortgage has long been an essential part of buying a home. However, as the costs of housing in Canada continue to become more expensive – both through rising costs of property and higher interest rates, lenders are facing increased pressure to be selective in who they offer mortgages to.
Introduced in 2018, the mortgage stress test is designed to safeguard the stability of the Canadian housing market and protect homeowners from taking on more debt than they can handle.
By ensuring that homebuyers can comfortably manage their mortgage payments even in adverse scenarios, the stress test aims to mitigate risks associated with high levels of household debt.
Here’s what you need to know about the mortgage stress test and how it may impact your real estate goals.
Getting pre-approved for a mortgage is a simple, effective way to get a better sense of what you can afford as a buyer. Click here to learn more.
Lending in Today’s Market
Rising costs of housing aren’t only due to the escalating value of the properties themselves. Today, buyers are faced with higher interest rates compared to years past. Not only does this make mortgages more expensive for consumers, but it also makes lending riskier for banks.
Rates can fluctuate, and when they go up, homeowners are suddenly faced with higher mortgage costs. So, what happens when a homeowner’s mortgage payments jump so substantially that they can no longer afford to make them?
The stress test is designed to mitigate that chance altogether.
Looking for more home-buying insights? Consider these other posts from our blog.
- Can You Buy a Home Without an Agent?
- How to Improve Your Credit Score Before Buying a Home
- What Does it Really Mean to Buy a Home in a Balanced Market?
Stress Test Basics
While the stress test was once only necessary for buyers who made a downpayment of less than 20%, it’s now applicable to anyone seeking a mortgage. So how does it work?
A lender will analyze a borrower’s existing income and debts to determine if they will be able to safely make payments should their costs of interest go up. In order to pass the stress test, a borrower will need to prove that they can still make mortgage payments at an inflated interest rate. This theoretical rate is referred to as the qualifying rate.
A borrower’s qualifying rate is not a static value, and it can change as economic factors shift or evolve. Instead, this number is determined by comparing two targets.
How the Qualifying Rate is Determined
Your qualifying rate will be the higher of these two numbers,
- The set benchmark rate (currently 5.25%)
- The rate offered by your lender + 2%
Given the recent interest rate increases in Canada, mortgages are currently stress tested using the lender’s rate + 2%. Should the Bank of Canada’s target rate decline, lenders may return to using the benchmark rate.
As qualifying rates increase, the total loan amount that a homebuyer will qualify for goes down. This has made the process of getting a mortgage more challenging for a number of Canadians.
What About Renewals & Refinancing?
The stress test doesn’t just affect homebuyers who are looking to obtain a new mortgage. In certain cases, it can impact existing homeowners as well. While mortgage renewals are exempt (provided they’re with the same lender), homeowners who are looking to refinance their mortgage will also be subject to the stress test.
Not sure if you’re financially eligible to purchase a home in today’s market? Explore these blogs for helpful information.
- How to Know If You’re Ready to Buy Your First Home
- How to Make Your Move Budget-Friendly
- What is ‘House Hacking’ & Why is it So Popular Among First-Time Buyers?
Getting the Most Out of Your Budget
Getting the most out of your home purchase isn’t just about selecting the right mortgage. Regardless of your budget or financial resources, working with an experienced real estate agent is the best way to find (and land) your dream home.
As a 100% family-owned team, Bosley Real Estate has helped Canadians find their perfect home for close to a century. Today, our advanced buying systems, client-first approach to service, and vast industry relationships help buyers reach their real estate dreams.
Whether you’re looking to buy your first, second, or fifth home, we’ll guide you through the process from start to finish.
Looking to buy a home in today’s marketplace? Our team of expert real estate professionals can help you navigate the process and maximize your buying power. Click here to contact us.
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