Stress testing is a risk management tool that tests the ability of borrowers to withstand an interest rate hike. When the Federal Government implemented a stress test in 2017, people started searching for alternative methods to secure a mortgage and different ways to enter the housing market.
For a mortgage application to be approved, the applicant must be able to carry a loan with an interest rate around 5%, even though the actual rate will be lower. This will reportedly block 50,000 Canadians from homeownership and has forced many to become more creative and prudent.
In their pursuit of homeownership, people have been ignoring banks in favour of alternative lenders whose approval process is less stringent and they are not as tied to the Bank of Canada. There’s a lot of value to non-traditional lenders.
People must cast a wider net as they try to secure a loan. The strategy is to meet with different lenders to determine who has the most favourable terms and offers you the best chance at approval. They can offer better rates, and in some instances, are more open to negotiating terms.
Mortgage stress testing isn’t going away, in fact, the Government and the Bank of Canada might implement more regulations to stabilize the market and prevent borrowers from defaulting on loans. To counteract this, borrowers can take certain measures to make their mortgage applications more attractive.
A higher down payment and paying down your debt can help your application withstand a stress test. Additional assets can also help. If you are looking to get a mortgage for an investment property, then partner with an experienced person who has good credit and can increase the down payment. Granted, some applications with big down payments will be rejected but it can still make an application more appealing in the eyes of lenders.
There are no tricks to beating the stress test or getting approved for a mortgage in 2018. For those looking to sell their home or enter the market, you need to review your situation with a mortgage specialist and determine if now is the right time. The other option is to simply wait a bit so that you can decrease your debt, increase your salary and assets and present a better application.