If qualifying for a new mortgage any time since January of last year has been on your radar, then you have probably been hearing about the financial stress test that the federal government introduced at that time. The stress test is exactly what it sounds like – it is a test to see if you would be able to financially handle a rate increase on your mortgage. The thinking behind introducing the legislation was to make sure Canadians wouldn’t have to default on their home loans in the event of interest rates going up. Canadian home buyers who wish to obtain a mortgage from a federally regulated lender must first pass this test.
How does the financial stress test work?
The financial stress test requires home buyers to meet the “minimum qualifying rate.” For home buyers without default insurance (those who have a down payment of at least 20%), that rate is either 2% more than what the lender is offering or the Bank of Canada’s five-year benchmark rate (whichever is higher). For home buyers with default insurance, the minimum qualifying rate is the higher of either the Bank of Canada benchmark rate or the rate being offered by the lender.
Effects of the financial stress test.
While the mortgage financial stress test was intended to protect Canadians, it did have some unintended consequences. For many Canadians, it made buying a home less affordable and they had to choose between delaying the purchase or purchasing a less expensive home than they originally wanted. This effect was particularly strong among younger Canadians as well as those who were new to the country.
Since less people were buying new homes, demand for rental properties increased – and with that demand, the cost of renting has gone up as well.
Another unintended consequence came for people who were renewing their mortgages. If they were already with a federally regulated lender, they did not have to pass the stress test to stay with that lender, but they did have to pass the stress test to move to another federally regulated lender. That meant that banks had less incentive to offer competitive rates on renewals.
What if I can’t pass the financial stress test?
As noted earlier if you can’t pass the stress test, you have the option of delaying purchase or buying a less expensive home. But there is also a third option. The financial stress test applies only to federally regulated lenders – and for the most part that means banks. It does not apply to provincially regulated lenders such as credit unions, nor does it apply to private or alternative lenders. So if you cannot pass the stress test, you should speak with your mortgage broker about your other options.
If you are interested in learning more about how the financial stress test applies to you or what your alternatives are, contact Akal Mortgages today.
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