The Mortgage Stress Test Q&A

Canada’s Mortgage Stress Test; Q & A

As you likely heard, the federal government has introduced a “stress test” to ensure people don’t over-borrow to buy a home only to lose it when mortgage rates rise again as they will. The effect of the policy has dampened housing markets across Canada. Setting aside issues of effectiveness and whether it’s even the government’s role to save us from ourselves, let’s look at what a stress test is and what it does to your house buying budget.

What the heck is a ”stress test” again?

Fortunately, the stress test is not something you need to study for. It’s simply a formula applied to your credit picture which dictates the size of a mortgage you can get. The requirement to prove your ability to repay a loan is neither novel nor evil. It’s bad for banks, banking customers and those who get in over their head and must default on their debts.

So what’s the diff?

Previously, banks only had to factor in the current interest rate when evaluating a mortgage application. Now they must use the 5 Year Rate which is almost two points higher than the prime rate. The stress test ensures you can still afford your home if rates creep up. After all, every point mortgage rates increase means hundreds of dollars more on your monthly mortgage bill.

Who is subject to the stress test?

Virtually everyone using a chartered bank mortgage is bound by the stress test no matter the size of mortgage being considered. Credit Unions and private lenders have some leeway but are inclined to adhere to the stress test formula for their own protection. Luckily, loans from good ol’ Mom and Dad are free from the stress test but not from the stress of having to ask your folks for money.

What can I do about it?

The stress test reduces your house purchasing power significantly. This means your choices are mostly limited to these options:

  1. Buy a less expensive home.
  2. Save for a larger down payment.
  3. Increase your income.
  4. Reduce your monthly debt and expenses.
  5. Find a private lender willing to ignore stress test rules.
  6. Lobby the government to change the stress test rules as many are doing.

Our View

It’s been our experience most people buy the most expensive house they can afford, risking becoming “house poor” for decades, though manage to pay it off eventually. Stress test or not, it is wise to buy safely within your means  and improve it slowly; creating the living space you’ve always wanted without feeling impoverished for a lifetime. And to ensure you aren’t over-paying for a property, get an expert appraisal from fully-licensed, industry-designated agents like those at Aura Appraisals Inc.

Good luck!

 

 

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