Understanding The Stress Test: What You Need To Know
If you don’t know what a “stress test” is, you should probably learn what it’s about before searching for your first home. If not, you might hurt your chances of being approved for a mortgage.
A stress test is performed by a mortgage lender (usually a bank) and it determines whether or not a borrower (that’s you) will be able to continue making mortgage payments on time as interest rates rise. Typically, a stress test uses past increases in interest rates to determine what the next five years has in store, then determines if your current income will be able to handle them.
To determine this, banks figure out what mortgage rate you qualify at (Canada’s minimum qualifying rate was 4.99% at the end of 2017). A qualifying rate is the ratio between your debt and your income.
In the past, only people with a down payment of less than 20% or a mortgage length of less than 5 years were required to take this test. But, as of January 2018, the rules dictating who is required to take a stress test have changed …
Recent Changes to the Stress Test
At the beginning of 2018, it was announced that ALL Canadian homebuyers and anyone looking to refinance their mortgage are now required to take a stress test, regardless of the size of their down payment or the length of their mortgage. These rules don’t, however, apply to people whose mortgages are up for renewal with the same lender.
So, almost all Canadians will have to qualify at the minimum qualifying rate for mortgages, which is becoming more aggressive (it recently rose to 5.14%).
What’s more, those who originally qualified at a higher rate than the minimum will be subject to even more conditions: If your original rate with a 2% increase is higher than the 5.14% qualifying rate, you will be subject to that minimum qualifying rate instead.
With all of these new rules, it’s important that you understand how to deal with them and what the best plan is for helping you get approved for a mortgage sooner …
These new rules affect one group of people in particular: Young, first time home buyers. Because younger people usually make less money, they are more at risk for not qualifying at a high enough rate to be approved for a mortgage, even if they save up a large down payment!
So, what are your options? Firstly, you can rent for longer. This way, you can wait until your income is high enough to be able to qualify at a higher rate.
For first time buyers who are more likely to have debt (such as student debt) it’s a good idea to pay off as much debt as possible before applying, because more debt means you’ll qualify at a lower rate.
Alternatively, you can consider purchasing a condo rather than a house, in the hopes of having a smaller mortgage and qualifying at a higher rate.
Whatever your situation, it’s usually a good idea to consider consulting a real estate professional to be able to figure out what your best option is for being approved for a mortgage sooner rather than later.