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Canadian Mortgage Stress Test: In-Depth Explanation

Mortgage stress test is a way of preparing for bad times. When you apply for a mortgage, before it gets approved, it is passed through a mortgage stress test in which a challenging situation is supposed to check the status of your mortgage payments. Currently, you may be able to pay your mortgage but what happens if you lose your job or interest rates unexpectedly rise, will your financial boat still be afloat. The answer to this query is called a mortgage stress test. As per the new Canadian law introduced in June 2021, all mortgage applicants must undergo this test to get a mortgage.

Mortgage Stress Test Example: Have a look

Let us now have a look at an example to better understand the new mortgage stress test Canada has implemented. If we say that a home is priced at $500,000. A 5% down payment is agreed upon with annual income being $115,000. No debt or other expenses due. One might qualify at 5.25% interest rate. But if the rate increases to 5.32% due to any reason, the same will fail the stress test. There is even a possibility that at a rate of 5.19%, you might fail the test. The rate can change rapidly and can disrupt the financial plans. A rate acceptable in 2019 might fail the stress test in 2020. This is the reason why every applicant must undergo a Canadian mortgage stress test.

Stress Test Updated Rules 2022

The main goal behind implementing the new mortgage stress test is to prevent the citizens from further burying themselves under the debts of mortgage which they may not be able to find a way out from. The impact of the stress test will be felt in 2022 when potential homebuyers will need to qualify for a mortgage after clearing the new mortgage stress test. Many brokers believe that the stress test may only filter out those who barely qualify for the mortgage they are applying for and that the rest of the applicants might be able to qualify with more innovation and ideas from the broker.

Mortgage Stress Test: Key Guide for First-Time Home Buyers

If you are looking to take out a mortgage for your first home or in the process to apply for home renovation loans to renovate your current home, it is advisable to conduct a mortgage stress test calculator first to get an idea of how much you will need to manage to get your loan approved. A mortgage stress test calculator by no means will give you the exact clarity about the approval but it will help you position yourself in the right spot before you apply for a mortgage. There’s the possibility that you won’t qualify for the amount you wish. However, you might pass the test with a smaller amount. Steps such as an impressive down payment will take you one inch closer to qualifying the new mortgage stress test and give you an edge.

Figure Out How to Pass Mortgage Stress Test

Now that you know there is no escaping the test, how about you start preparing to pass it with flying colors? The very first step is to get a rough idea using a mortgage stress test calculator. This will make it easier for you to prepare your deal. Now there are factors such as your previous debts, your down payments, and the GDS (Gross Debt Service ratio) that you can work on before applying for a mortgage. The higher the down payment, lower the previous debts the better the passing chances. GDS is a percentage of your pretax income, and it should not exceed 32%. Your TDS (Total Debt Service ratio) should also not be more than 42%. In other words, it measures the total income necessary to maintain control over your debts. By reducing the amount, you are applying for might help you from finding yourself in a tight financial situation with the stress test as well as mortgage payments.

The Stress Test: Can Home Buyers Avoid It?

The other thought which might have just popped into your head is, what if you could completely avoid this situation? Or how to avoid the mortgage stress test altogether. It’s not as easy as it sounds. The stress test is regulated by OSFI (Office of the Superintendent Financial Institutions) but the private mortgage lenders who do not fall under its jurisdiction might not be interested in keeping up with it. The federally regulated banks are responsible to maintain these tests but not the private ones. But you might be hitting another wall while dodging the stress test bullet as they might charge you with very high-interest rates and you might get stuck into a bigger financial conundrum. It is hence important to do your homework with a mortgage stress test calculator and see if you can qualify the test by making minor twists in your finances.

Does Stress Testing Apply to Insured Mortgages?

Does the stress test differentiate between insured and uninsured mortgages when it comes to the application? It does not. The stress test will be applied to both insured and uninsured mortgages with an interest rate of 5.25% and rate plus 2% to test the affordability of paying back the mortgage easily. Uninsured mortgages may help those who do not fall under the OSFI jurisdiction to avoid the stress test, but insured mortgages are required to undergo the stress test.

Make it Easy Through Trusted Mortgage Broker

Keeping yourself up to date about any latest developments made or regulations set for the Canadian mortgage is crucial, as this can potentially affect your future mortgage or plans to become a homeowner. The mortgage stress test of Canada is one solid example of how the buying capability of some of the middle-class Canadians might have to take a back seat due to the incremented passing percentage. But the aim behind the Canadian mortgage stress test is to decrease the number of Canadians getting caught in the trap of cycling debts. The best policy is always to keep your debts at a minimum and save more for the down payment. The rest can be sorted by affiliating yourself with someone with good command over the mortgage regulations and has the brains to get you the best stress test qualifying deal. A sound financial policy and the correct documentation with a certified mortgage broker might be one step closer to you solving your problems. You may visit our services that we provide in this regard by clicking here or by leaving your contact details here for us to reach you.