Whether you’re a first-time home buyer or buying your tenth house, no matter your down payment amount, you have to face a mortgage stress test in Canada. You’ve probably heard the phrase before, but does it actually mean? Unlike medical stress tests, you won’t have to run on a treadmill.
Here’s what a mortgage stress test is and how it might affect your chances of securing a mortgage.
Nothing to study for
The stress test isn’t a list of questions or event-based situation; it’s designed to prove that you can afford mortgage payments at an interest rate higher than what’s actually in your mortgage contract. This way, if interest rates were to significantly increase at some point, the bank knows that you’d be able to continue your payments.
The interest rate your lender uses depends on whether or not you need mortgage insurance (down payment less than 20% of the purchase price). If you need mortgage loan insurance, then the bank uses the higher rate between the Bank of Canada’s conventional five-year mortgage rate and the interest rate you’ve negotiated with your lender.
If you don’t need mortgage insurance, the test is a little more stringent, and the bank uses the higher rate between the Bank of Canada’s five-year and the rate you’ve negotiated with your lender plus 2%.
I have the money — why the test?
Despite your negotiated interest rates and even choosing a fixed mortgage, banks want to ensure that you don’t bite off more than you can chew in a mortgage and that, if rates were to increase, you’d have some wiggle room in your finances. While that may sound like banks just protecting themselves, you also wouldn’t want to become “house poor.” And nobody wants to say the ‘F’ word — foreclosure.
The stress test was also put into place as a means of reducing household debt across the country. Debt has been on the rise, with consumer debt per person at more than $20,000 in most provinces. According to Loans Canada, the total debt owned by all Canadians is around $1.8 trillion, with mortgage debt making up roughly $1.29 trillion.
How will it affect my chances of buying a home?
In 2019, the Bank of Canada’s interest rate was lowered for the first time in over a year, making it effectively easier to purchase a slightly more expensive home, which means it’s even easier to purchase a home with a price tag that’s within your means and somewhat easier to buy one that’s a little outside of that scope.
The best advice is to just live within your means. Create a monthly budget that includes your expenses compared to your income and make sure your mortgage payments aren’t leaving you with nothing every month.
Questions?
If you have any questions about how a stress test might affect your home-buying chances or you’d like to explore some homes in Winnipeg and the surrounding area, please don’t hesitate to call or text Gino Cipriano at 204-955-5853 or send him an email at ginocipriano@royallepage.ca.