|Could You Pass the Test?|
By now, you’ve likely heard the buzz about the ‘Mortgage Stress Test’. If you haven’t, it came into effect January of this year. The new rules mean that ALL homebuyers in Canada (including those refinancing or switching lenders) will need to prove they can maintain mortgage payments should they be faced with a rate hike in the near future.
Just beginning your search or about to renew your mortgage? You might be wondering, ‘how will I be tested?’ Well! You’ll have to qualify with your lender at the higher of either the Bank of Canada’s 5-year benchmark rate (5.34% May 2018), or, the rate your bank is currently offering plus 2%.
So how does this translate to those of you faced with the stress test? You may be required to pay down other debts to qualify. These might be car loans, lines of credit or credit card balances. Those who pass may be faced with a rude awakening when your home search parameters are vastly affected. Your price bracket might need to be lowered, which may mean looking at smaller homes, homes in a different neighbourhood...or an entirely different city then planned.
Whether you’re faced with the test or not, it might be good practice
to self-stress test! It’s simple - just take the principal on your current
mortgage and apply either the benchmark rate, or, your current rate +
2% to see how your payments are affected. A four year fixed rate mortgage for $400K at 3.89% translates to $2,144 monthly. Now, stress test that by changing out the 3.89 to 5.89% and you’re talking monthly payments of $2,597...over $450 more per month...over $5,400 per year.
Not sure where this leaves you in your home ownership goals? We’re happy to help. We can put you in touch with our most trusted mortgage brokers who’ll help guide you through the process!