Mortgage Stress Test: Everything you need to know

Quick Summery

Getting a mortgage is challenging enough for most people in Canada, but have you ever imagined how your life is going to change after you get approved for a mortgage

In January 2018, the new mortgage rule was introduced. The federally-regulated lender in Canada is requiring all Canadians who are applying for a mortgage to go through the OSFI mortgage stress test. Including those who have amazing credit and put a 20% down payment still need to go through the stress test.

The Following Explains the Mortgage Stress Test

In the finance aspect, a mortgage stress test is exactly what it sounds like. But place off your pencil, it’s not that type of test. It is a way of testing how you and your finances might affect by a sudden change of your financial circumstances such as loss of employment or reduced income. It is designed for a worst-case scenario, and being prepared for it.

For example, before a pandemic hits us, you have saved $100,000 in your savings account, and when the pandemic comes, many people have lost their job and shut down businesses including you, no one can tell us when this crisis will stop. So, will your savings be enough to cover the bills and other expenses for the next few months? Are you prepared for this financial crisis that we are all experiencing? If not, your savings in your account failed the stress test.

The new mortgage rule will now have a straight effect on how much you can afford, and you will have to prove that you could still be able to make your monthly payment if the interest rate rises.

How Mortgage Stress Test Works 

To pass the OSFI (Office of the Superintendent of Financial Institutions) mortgage stress test, you need to qualify at a contracted mortgage rate plus 2% or the Bank of Canada’s current five-year benchmark rate, whichever of the two is higher. 

As of this writing, the Bank of Canada qualifying rate is 4.79%. So, for example, you are applying for a mortgage with a 3.1% interest rate, then your lender will determine if you were able to pay your mortgage at 5.1% (3.1%+2%), considering 5.1% is higher than the Bank of Canada’s five-year benchmark rate which is 4.79% only.

Is It Possible Not to Go Through the Mortgage Stress Test?

A mortgage stress test is designed for federally-regulated banks. However, credit unions and other private lenders are not under OSFI’s rule. As such, credit unions and other lenders are not required to put their applicants to go through the mortgage stress test the way the traditional banks and federally-regulated banks do. 

While it might be easier for you to qualify with a non-traditional lender, they have come in a position wherein they were able to charge more for their services. However, you need to research before applying with one, as it could end up costing you more down the line if not to do so.

What Is the Purpose of a Mortgage Stress Test?

Even though the new mortgage rules are supposed to protect the Canadian housing industry (and make sure that Canadians are spending within their means), the changes also mean that you might have to put down for a lower budget.

With an end goal to reduce the country’s household debt problem, OSFI offered some changes to Canadian mortgage and housing rules. One of these was the implementation of a mandatory “stress test” for potential property owners who are acquiring through federally regulated lenders, such as banks. 

Already Have a Mortgage, Still, Need to Qualify?

Some people are wondering if they will still need to qualify for a mortgage stress test if they already have a mortgage?

Well, the good news is you do not need to run for a mortgage stress test if you will renew your mortgage with your current lender. You will only have to do the stress test if you switch to a different lender. Switching with a new lender will require you to qualify for a mortgage stress test in the event of refinancing your home, take out a homeowner line of credit, or any type of mortgage.

I Got a Mortgage with Bad Credit, Can I Still Pass the Stress Test?

It is very challenging to pass the stress test when you have a mortgage bad credit history. However, as the information provided above, there is an option to skip the stress test. 

More and more lenders are offering mortgage products that are designed to evade the mortgage stress test such as a private lenders or credit unions. Meaning, there is a chance of getting a mortgage with a bad credit rating with the help of alternative lenders.

Final Thoughts

Going through the mortgage stress test can be a little bit upsetting. However, preparing for the worst-case scenario is one the best thing you can do for yourself especially when it’s about your financial status. A mortgage stress test will help you to be more prepared in terms of your financial circumstances. That is not only about the mortgage aspect, but in all of your finances in life. 

Handling the new mortgage rules and rising interest rates might be complicated, however, you don’t have to do it alone. To know the other options that suit your financial needs, you may visit https://faizalgarasia.com.

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