In October 2017, the Federal Government announced that a mortgage stress test would be applied to all mortgage applications in Canada. This news caused a firestorm of opinion and questions as many believed that it would block tens of thousands from homeownership.
What do current and future homebuyers need to know about the stress test, and what positives can be drawn from this Government intervention?
Under this test, homebuyers must prove that they can afford a mortgage at either a five-year rate close to 5% or two percent higher than their current rate, depending on which is higher. The idea is to prove that a household will survive in the event of an interest rate hike.
The stress test is now embedded into the pre-approval process and is unavoidable for the most part. Homebuyers must evaluate their ability to pass the test or speak to a mortgage expert.
Insured and Uninsured First-time Homebuyers
An uninsured borrower is one who puts a minimum of 20% towards the purchase price as part of the sale. For borrowers who have a down payment below 20%, they must pay additionally for mortgage insurance.
Many uninsured borrowers assume that their down payment would exempt them from the stress test. Being able to pay a larger lump sum upfront doesn’t tell the lender that an applicant can carry the cost of a home monthly. Both insured and uninsured borrowers will be subjected to the stress test.
The stress test is not retroactive, meaning if your mortgage was approved prior to October 2017, then there will be no impact on your situation. In addition, if you renew with your existing lender, then you are exempt from the stress test. With respect to renewals, if you switch lenders then you will be subjected to the stress test during the process. Be sure to speak with your broker to confirm as this can vary from lender to lender.
The best advice is to not get too stressed about this situation. This new rule is designed to protect borrowers and lenders in the long-term against any market volatility.
There is a lot of information to sort through so speak with a mortgage specialist to review your situation and start the pre-approval process.