Taking the mystery (and the stress) out of the mortgage stress test
On their own, the words ‘stress’ and ‘test’ don’t exactly say, “well, this is going to be fun.”
Put them together; then add the word ‘mortgage’ into the mix—now you’ve got a process that has been causing Canadian home-buyers trepidation and confusion since it was first introduced back in 2018. With 43% of Canadians not fully understanding how the mortgage stress test works, it’s time to take the mystery and the stress out of ‘the test’.
To demystify the whole stress test process, we enlisted the expertise of our very own Lending Services team.
One of the most common questions Educators Mortgage Agent Level 1 – Mortgage Specialist Federica Screnci gets from clients is what exactly is the mortgage stress test? “To put it simply, the mortgage stress test is a tool used by lenders to ensure that borrowers will still be able to make payments on borrowed funds in the event interest rates rise,” explains Federica.
But how exactly does the mortgage stress test work?
Federica continues, “Let’s say you want to get approved for a mortgage. Using the stress test, lenders will consider two factors in order to qualify you—the current mortgage rate being offered plus 2%; along with the 5-year Bank of Canada (BOC) benchmark rate. Whichever of the two is greater is the rate you’ll have to qualify for.”
As of June 2021, the 5-year Bank of Canada benchmark rate was raised from 4.79% to 5.25%.
This means that if you’re a first-time homebuyer or an existing homeowner looking to refinance, your mortgage affordability factor is now a little tighter.
Educators Mortgage Agent Level 1 – Regional Director, Lending Services Chris Knoch elaborates, “This means if you’re applying for a mortgage today, or looking to be pre-approved for a mortgage, you will be qualified based on the BOC benchmark rate of 5.25%. Having said that, if the posted rates are 3.26%, or more, you will be qualified at the posted rate plus 2% (given that will be greater than the BOC rate benchmark rate).”
What is a ‘benchmark rate’? A qualifying rate set by the Bank of Canada that is based on mode average of the current posted 5-year fixed rates offered by Canada’s 6 major banks.
How much of a difference can the new 5-year Bank of Canada benchmark rate make on the amount of mortgage you qualify for?
That depends on the amount of mortgage you’re looking for.
Educators Mortgage Agent Level 1 – Regional Director, Lending Services Nick Rao paints a picture by doing the math:
(with stress test in play)
|Qualifying rate (example)||4.79%||5.25% (BoC benchmark rate)|
|Qualifying mortgage amount
(Example based on an annual income of $72,000)
|Impact on borrowing power||—||– $18,065*|
* These figures do not take into account annual property taxes, heating and/or monthly condo fees which also impact the mortgage amount.
“As you can see, the maximum mortgage amount is less than what it would have been prior to June 1st, 2021 with the new stress test now in play. Specifically, in the example above, the buyer’s borrowing power has reduced by -$18,065 or about -4.39%,” explains Nick.
“This change comes in response to the housing market which has surged to all-time highs, and the average mortgage which has followed suit. The Bank of Canada needs to ensure that borrowers can withstand market stresses if rates go up. However, don’t let the stress test get you down. It was introduced as a safety measure.”
Is there any way of getting out of taking the mortgage stress test?
Possibly. If you currently have a mortgage and are looking to renew with the same lender, the stress test may not be required. Also, lenders that are provincially regulated aren’t required to enforce the stress test—although some may choose to do so.
Other instances where the stress test is mandatory:
- When refinancing your home
- When you are taking equity out
Facing no other option but to take the mortgage stress test? No problem. Federica, Chris, and Nick have put together some pre-planning tips to take the ‘stress’ out of the test.
- Keep your debt-to-income ratio under control
- Pay down your debt as much as possible prior to applying for a mortgage
- Use a mortgage calculator to see what kind of mortgage payment you can realistically afford
- Look for ways to cut spending to maximize your monthly cash flow
- Develop a down payment-saving strategy
Let our lending specialists take the stress out of your mortgage application process.
Whether you’re looking into financing options for the purchase of a home, or consolidating debt to free up your monthly cash flow—reach out to Educators Financial Group. Because no matter where you are on the pay grid or what your pension income is in retirement, we can offer you a stress-free mortgage solution that fits your specific financial situation and provides you with peace of mind.
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