How Does The Mortgage Stress Test Work?

Mortgage Stress Test

In January 2018, homebuyers in Canada had to pass a stress test when qualifying for a new mortgage. The Canadian Mortgage and Housing Corporation implemented the Mortgage Stress Test to protect Canadians. It requires homebuyers to be eligible for a mortgage at an even higher interest rate to ensure that they can fully pay their loan. You can’t obtain a mortgage unless you pass the stress test set out by the Canadian Government. 

In 2018, homebuyers were required to qualify for an interest rate of 4.79 percent for their mortgage. However, new changes have been implemented. As of June 1, 2021, homebuyers should qualify for an interest rate of 5.25 percent. Don’t get discouraged; it’s actually for your financial benefit and well-being. At least you will never have trouble paying for your mortgage in the future. Also, don’t worry; you can do something to prevent having to go through the Canadian Mortgage Stress Test. 

How It Works

The main purpose of the stress test is to ensure that Canadians planning to buy a home in the future have the financial bandwidth to resist any interest rates hikes. With the stress test, it would help if you have a higher income to qualify for the same mortgage amount. This is because your purchasing power, or the amount of money you can borrow, is reduced. On the brighter side, it really will remove the stress associated with not paying your mortgage. If you pass it, that means that you can withstand anything; it means that you are likely to fully pay your entire mortgage. 

What does the stress test mean for Canadian homebuyers? If you only need $90,000 income to get the mortgage, you’ll need more income if you want to pass the stress test. Otherwise, you will have to find a home that’s a little cheaper in the purchase price. That way, you won’t have a hard time financing a home that costs much more than you can afford.  

Remember, though, that the stress test only applies to prospective homeowners with uninsured mortgages or those homebuyers who put down a 20% downpayment to avoid paying for the mortgage insurance. Insured mortgages or homebuyers who pay less than 20% downpayment will not be subject to the stress test. Credit unions are also not required to apply the stress test when qualifying Canadian homebuyers for the mortgage. 

It may appear like the stress test is limiting, but it also has many benefits, such as ensuring that you can comfortably afford the home you want to purchase in the future. Passing the stress test means that you will not encounter any stress-inducing circumstances where it’s difficult to get the funds for the monthly amortization. 

The stress test will prepare all homebuyers to leave room in their finances to get ready for the unexpected such as costly home repairs, fluctuating interest costs, and other unexpected life events. You might want to consider factoring 2% in your income for this to make it easier for you to pay your mortgage. 

What Homeowners Can Do

A good lending approach to help you avoid foreclosures and other mortgage issues is to use the guiding principle of borrowing no more than 4x of your yearly income. For example, if your income is only $90,000, you should only consider borrowing about $360,00 for the purchase price or within this range. Also, it’s always better to be realistic with your monthly expenses rather than cause unnecessary stress. If the stress test results are making it difficult for you to acquire a mortgage, it may not be the right time to buy a home yet. What you can do is to keep saving, so you can afford your dream home. The stress test makes sure that you’re ready for anything that comes along when buying a home.

We also recommend that you speak with a professional, so you know what your options are. Don’t hesitate to contact us; we are always available to discuss everything you need to know about the mortgage stress test and about buying a home. 

Getting Ready to Buy Your New Home

There are things you can do to prepare yourself and avoid other issues down the road. 

Limit the Wants

One of the best practices is to create a budget for yourself. Set aside an amount each month for all your needs and some wants. Try to limit the luxuries as much as possible, especially if you’re thinking about buying a home in the future. You can save a lot when you make your meals instead of eating out at restaurants every day.

Prepare for Unexpected Events

It’s best to always prepare for emergencies such as suddenly losing a job or supporting someone. Lifestyle changes such as having another child can also significantly affect you financially. Ensure that you’re ready for these things. 

Avoid Debt

As much as possible, avoid getting into more debt as that can hurt you financially. Use a cash or debit card to avoid paying for interest rates on your credit card bills. Also, consider building in a buffer so you can comfortably afford to pay for yourself. 

Contact Lend Today

Do you need help navigating through the mortgage process? Our team at Lend Today is committed to helping out all homeowners acquire financing for their mortgages. We are connected with several lenders in Canada willing to extend mortgage loans even to borrowers with bad credit. It’s easy to apply — simply submit all the documents needed and let us do the rest. Feel free to reach out to us if you have more questions or if you’re now ready to get started with your mortgage. Don’t let the Mortgage Stress Test Stop You — it’s meant to help you comfortably and fully pay for your mortgage. Contact us if you need additional help.