New Mortgage Stress Test Rules;
How Does This Affect You?
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Are you in the market for a new property in Canada? If yes, then you might have to spend a little more than before; as Canada’s banking regulator has introduced new mortgage stress test rules that decrease the buying power of most borrowers.
Here’s everything you need to know.
What is a mortgage stress test?
A mortgage stress test is a modeling method used to determine exactly how much you can afford, and under what conditions are needed for you to afford it. For example, what if you lost your job due to covid,? Or what if interest rates go up? Can you still afford to make your payments?
A mortgage stress test can provide an answer to those questions. This ensures that you can still afford to pay your mortgages even when something unexpected were to happen. This will ultimately impact your decision of what kind of home you’ll want to buy.
New mortgage stress test changes
As of June 1, both uninsured mortgages and insured mortgages must be approved at a higher qualifying rate of 5.25%, whereas previously it was at 4.97%. This new change is said to ensure homeowners could afford the payments even if interest rates were to increase from their current lows.
Photo by Jane Palash
How will this impact you?
This increase in the qualifying rate will significantly impact Canadian homebuyers, as it will make it more difficult for homebuyers to qualify for a mortgage. According to calculations conducted by Ratehub, with the new qualifying rate of 5.25%, homebuyers will be able to afford 5% less compared to the previous rate of 4.97%.
However, if you had your mortgage pre-approved prior to June 1st, you may still be able to underwrite the loans based on the previous rate of 4.97%.
Even if you found the best interest rate today, you should always assume that the interest rate could increase in the future. If you have a variable-interest-rate mortgage, when interest does increase, it’ll have an immediate impact on your mortgage payments. However, with a fixed-rate mortgage, you’ll keep your current rate until the mortgage comes up for renewal. Although it’s impossible to predict what interest rates will be like in the future, it’s always best to plan ahead by choosing a home that you can most reasonably afford.
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When buying a home it’s important to always be kept informed about the latest changes to the Canadian mortgage regulations, as this impacts how much you will pay for your mortgage (this could be the difference of tens of thousands of dollars). Aside from that, the next best options are to increase the amount of money you can borrow by increasing your income and saving for a larger down payment.
If you need additional help, you can always visit your local mortgage broker to perform a mortgage stress test for you before buying a home. Being experts in the field, they are always up-to-date with the latest lending policies so that you are getting the best rates possible.