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Things you should know about the mortgage stress test. Mortgage Stress Test Client First Mortgage Solutions

Looking at essential facts to understand the mortgage qualifying rate.

What is a mortgage stress test?

A mortgage stress test, is the qualifying benchmark set by the Canadian Government’s Office of the Superintendent of Financial Institutions (OSFI).  It is to reduce risks to the housing market, such as mortgage default risk.  The Minister of Finance is responsible for setting mortgage stress test rate for insured mortgages and OSFI sets the mortgage stress test rate for uninsured mortgages.

The reason to set a mortgage stress test, is due to fluctuating interest rates. One of the few factors that can affect the cost of buying a house.  The mortgage rate is one of the biggest reasons the cost of a home may increase, particularly if you use a variable rate mortgage, which is linked to Bank of Canada(BoC) rates and rise and fall based on the bank rates.

Now set at 5.25% the mortgage stress test rate is applicable to all mortgages, both uninsured and insured (homes bought with down payments less than 20%).  To make sure you will be able to afford any possible mortgage cost spike, the mortgage stress test rate is higher than the lending rate you would get from a financial institution.

How does it work?

A mortgage stress test is a high interest rate on a mortgage application, that a financial institution uses to qualify you.  When introduced, the stress test rate lowered mortgage approvals by roughly 20%, compared to the previous qualification requirements.

For example: If you qualified for a $500,000 mortgage, with an interest rate of 2.25% for a 5-year period, the maximum mortgage you could qualify for, may be lowered to $400,000, if you use the stress test rate of 5.25%.  Your mortgage approval would be reduced by roughly $100,000 if you qualify  at 5.25% versus the contract rate of 2.25%.

What is the current stress test rate?

Currently set at 5.25% or your current interest rate plus 2%, whichever is the higher.

What is the purpose of the stress test?

The purpose of a mortgage stress test, was to prevent potential homebuyers from taking out a mortgage that was too costly for them.  Therefore getting themselves into even worse debt and contributing to Canada’s household debt problem.

Initially the mortgage stress test applied only to those people who were looking for high-ratio mortgages (people who were making down payments of less than 20% of the purchase price), and who therefore had to pay mortgage default insurance premiums.  As of October 2017 however, all potential homeowners had to take the mortgage stress test.

Can I get a mortgage without a stress test?

The mortgage stress test was designed for federally regulated banks.  Private lenders or provincially regulated lenders are not under the jurisdiction of OSFI.  Unlike federally regulated lenders like traditional banks, private or provincially regulated lenders are not required to put mortgage applicants through a stress test and are generally more flexible in their lending requirements.  Provincially regulated Credit Unions, have decided to either follow the federal stress test guidelines or create their own.

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