At the start of 2018, the Office of the Superintendent of Financial Institutions (OSFI) enacted the all-new mortgage stress test for mortgages.
The “stress test” requires the qualifying rate for both insured (a down payment of less than 20%) and uninsured mortgages (a down payment of 20% or more) must be the greater of the Bank of Canada’s five-year benchmark rate or the rate homebuyers negotiate with the lender plus two percentage points.
How this applies to homebuyers
For example, even if you are able to negotiate a mortgage rate of 3.25%, your finances must still have to show that you will be able to handle mortgage payments should interest rates climb to 5.75% or higher.
The impact of the stress test is being felt across CanadaA recent report by Mortgage Professionals Canada states that since the OSFI rules came into effect, homebuyers are having to downsize their borrowing by as much as 20% compared to the same time period in 2017. No matter where your finances stand, 20% less of a mortgage loan is still significant enough to potentially prevent you from purchasing the home you would like.
Three tips to help you navigate the new mortgage rules so the stress test doesn’t stress you out:
- Pay down your debt.
When you’re shopping for a mortgage, keep in mind that any debt you have will affect the mortgage amount you can qualify for including car loans, credit cards, student loans and any other debt you may owe. If you want to stay one step ahead of the stress test, you should attempt to pay down this type of debt prior to applying for a mortgage.
- Adjust your time frame and expectations.
The reality is that even if you are buying your first or second home, the stress test means that all homebuyers may have to make a few adjustments to their initial timeframe and expectations. This is where patience along with a sound financial strategy will get you the win in today’s real estate market. Taking an extra year or two to pay off your debts and loans while saving for a larger down payment will pay off in the long term. If you cannot delay your purchase, you may have to accept that your first choice may be out of your price range. Be sure to have several properties lined up that you’d be just as happy with that may come at a lower asking price.
- Do your homework.
Scenario 1: If you signed a contract to buy a pre-construction home or condo before January 1, 2018 chances are you still fall under the old mortgage rules—which means you not will not need to undergo the stress test.
Scenario 2: Use our services to help you shop around for an alternative lender that doesn’t have to apply the stress test yet because they are not subject to the same regulations covering banks and other traditional lenders. However, don’t forget that when your mortgage comes up for renewal, if you chose to switch lenders, most lenders will have you qualify under the new policy that is now in place.
Our goal is to help you navigate the stress-test and provide you with the assistance you may need to purchase the best home that meets your financial goals. In it to win it! Let’s get started on your mortgage approval journey today.