With mortgage requirements and approval challenging enough, securing a mortgage in 2021 could be even trickier thanks to the mortgage stress test. Having begun back in 2018, anyone applying for a mortgage in Canada from a federally regulated lender, is required to undergo the OSFI Mortgage Stress Test, even for those with a minimum down payment of at least 20%. This means that homebuyers will have their finances examined in even more detail than before, and proving their ability to make mortgage payments, has gotten a whole lot tougher.
Let’s look at the Canadian Mortgage Stress Test in a little more detail:
What is the Mortgage Stress Test?
Designed to show how potential homebuyers intend to make their mortgage payments should interest rates rise or you experience unexpected financial hardship, passing the mortgage stress test means that you’ll need to qualify at your contracted mortgage interest rate plus 2% of the Bank of Canada’s current five-year benchmark rate, whichever one of the two is greater.
The introduction of the stress test has meant that many homebuyers have had their purchasing power significantly reduced, because they’re eligible only for a lower loan amount at the new, mortgage stress-tested rates. The rules of the stress test have also made it more difficult for existing homeowners to refinance or renew their mortgages.
Why was the stress test introduced?
Designed to help tackle household debt in Canada and stop consumers from becoming even more indebted to lenders by taking on mortgages they can’t afford, the Office of the Superintendent of Financial Institutions Canada (OSFI) proposed that some changes be made to the mortgage and housing rules back in July of 2016. One of these changes was the implementation of a new and mandatory stress test for those homebuyers borrowing through regulated lenders, such as banks.
While the test originally only applied to those making more than a 20% down payment, and homeowners with a mortgage term of less than 5 years, it became mandatory for all candidates applying for conventional uninsured mortgages from October 17th 2017.
Preparing for the mortgage test:
Consulting with a qualified mortgage broker before applying for a mortgage is a good idea irrespective of the stress test, but doing so will help you have a much clearer idea of what you can expect throughout the testing process, and enable you to improve your chances of securing a loan to purchase a new home.
Is it possible to bypass the mortgage stress test?
Because the stress test is designed for those banks that are federally regulated, some other lenders such as credit unions and private lenders – who are not under the OSFI’s jurisdiction – are not required by law to test their mortgage applicants in the way that traditional banks and other federally-regulated lenders must.
For more detailed advice and guidance about passing the mortgage stress test, or exploring other, non-traditional lending options, talk with your local mortgage agent, who will have all the latest, up-to-date information regarding requirements, laws and even mortgage trends and predictions for the year ahead.