The Mortgage Stress Test Defined
In early October of this year, the Bank of Canada announced new changes to its mortgage financing rules. These new rules come in the form of a stress test. Stress testing your mortgage acts as a frontline assessment for lenders to determine borrowers’ mortgage affordability at the BoC rate of 4.64% on a standard 5-year fixed-rate. Doing this ensures that borrowers can still afford their loans at sudden or future interest rate hike.
Who the mortgage stress test affects
The mortgage stress test affects home buyers who offer down payments worth less than 20% of their total mortgage amount. This means that if you require CMHC insurance, you’re automatically “tested” on your mortgage eligibility and ability to pay at the federal rate.
What the mortgage stress test involves
As a first-time buyer, from October 17th onwards, your lender calculates your affordability at 4.64%. This calculation factors whether or not you could still afford your mortgage (based on your income) at the Bank of Canada’s posted rate. Your lender figures out your maximum monthly mortgage, relates that to the BoC rate, and works from there.
Generally speaking, the less you put down, the greater your monthly payments will be. This leaves you at risk for losing buying power on your down payment savings or even a denied application.
If you offer 20% or more, then the rules don’t apply to you altogether.
Refinancing your mortgage still means that you’ll be allowed to refinance up to 80% of your home’s value. However, starting from November 30th, refinancing a CMHC-insured home is no longer allowed.
If you’re renewing your mortgage terms, you won’t be affected by the new changes imposed by the CMHC.
Actions to Take
- If you can afford to add an extra 3-5% to your down payment value, doing so can increase your affordability and save you thousands in interest payments.
- You were pre-approved for a mortgage and didn’t buy your home before the rules changed, your pre-approval value likely decreased/mortgage has to be reassessed. Contact your lender to see if this is the case.
- If you’re renting and are looking to buy a home soon, try to cut back on non-essential expenses and add any excess funds to your down payment savings.
Ultimately, Canadian consumers are careful spenders and seek to maximize their hard-earned dollars. While the new rules may seem like a roadblock to homeownership, knowing them can help you leverage savings towards a new home.
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