The mortgage stress test – what you need to know

On October 3, 2016, Canada’s Finance Minister announced the latest round of mortgage rule tightening:  a more stringent mortgage stress test for borrowers looking to get a new mortgage. The hope is that making it more difficult to qualify for mortgages will protect our housing market over the long term, especially in hot real estate markets like Toronto.  Regardless of whether the rules will accomplish what the regulators expect, most people will be affected in one way or another. The biggest impact is on people whose down payment is less than 20%.  (Click here to see how the changes affect you if your down payment is more than 20%.)

Here are the highlights and what they mean for you, if you’re getting a high ratio mortgage

If your down payment is less than 20% of your purchase price, your mortgage is considered a “high ratio” mortgage.  In this scenario, you need to have default insurance.  This rule has been in place for many years.  It’s there to protect the lender, so they can feel comfortable lending to you even though you don’t have a lot of “skin in the game”, financially.

What’s changed in the mortgage rules?

You now have to qualify for your mortgage
using the Bank of Canada qualifying rate, and
a 25 year amortization

At the time I’m writing this, the qualifying rate is 4.64%.  Don’t worry, you won’t actually have to pay 4.64%!  I can find you a much better mortgage rate.   But,

you’d still need to show
you can handle the mortgage as if
you were being charged the qualifying rate.

Previously, mortgage professionals had to use the mortgage stress test rate if you were getting a 1-4 year term, or if you wanted a five year variable term, because they were considered more risky. Now, we have to use the stress test rate on every single high ratio mortgage.

Why?  The government wants to be sure that borrowers can handle any increases in mortgage rates down the road, when their mortgages come up for renewal.

Wondering if your mortgage payments will be higher?

The answer – thankfully! – is no.  Your payments will still be based on your actual mortgage “contract” rate.

So what’s the negative about the new mortgage stress test?

You might qualify for less – in some cases, up to 20% less – meaning buying a less expensive home.

Are there ways to still qualify for that bigger mortgage?

Yes.  That’s where some thorough mortgage planning comes in.  Options to look at include saving up a larger down payment, getting rid of all or most of your other debts, or adding a co-signer to your mortgage, to strengthen your application.

When does the mortgage stress test not apply?

Some mortgages will still be handled under the old rules.   These include the following scenarios:
• A mortgage loan insurance application was received before October 17, 2016, or
• The lender made a legally binding commitment to the mortgage before October 17, 2016, or
• The borrower entered into a legally binding agreement of purchase and sale for the property before October 17, 2016.

Have more questions?

Give me a call or shoot me an email if you want to do some mortgage planning around how this impacts you.  There’s no obligation, and I’m happy to help!