ERIN HENRY
Broker, Royal LePage Real Estate Services Ltd. Brokerage
Erin Henry is an experienced Sales Representative providing comprehensive real estate services to home buyers and sellers with over 25 years of dedication and expertise!
erinhenry.ca
MORTGAGE. STRESS. TEST. Three words many would find intimidating on their own let alone together. As of June 1, 2021, all borrowers will now be faced with rules and regulations known as the mortgage stress test. Here is what you need to know!
Human nature is to prepare ourselves for worst case scenarios. A mortgage stress test is similar in that it’s preparing borrowers for an increase in rates, as well as real estate and economic fluctuation. What is a stress test? How does it pertain to Canadian mortgages? How can you be prepared?
A stress test involves modelling a bad financial scenario before it is actualized. A mortgage stress test is a means of determining how much you can afford under different scenarios. For example, an increase in interest rates, or decrease in income.
As we continue to forge ahead amidst the aftermath of COVID-19, it’s a time for regrowth and stabilization.
— Erin Henry
What is a Canadian mortgage stress test? Since 2018, high ratio mortgages (less than 20% down payment) were subject to more scrupulous stipulations. The difference now, is that ALL mortgages including conventional (more than 20% down payment) are. The bank will now require proof that not only can you afford the offered rate, you will also need to qualify for the mode average of posted 5 year fixed rates from Canada’s top banks. Simply said, your income needs to be high enough and debt ratio low enough to offset a possible rise in interest rates. This will likely mean less borrowing power and/or principle.
More specifically, as of June 1, 2021, mortgagees must qualify for a rate of 5.25% (previously 4.79%). Implemented in the Spring of 2020, the general rule was for high ratio borrowers to qualify 2% higher than the posted rate. Now it’s the greater of the two for ALL borrowers.*
The bottom line. The Canadian mortgage stress test, is not deemed catastrophic. In practice, this will generally impact only the people who have high debt-to-income ratios. Roughly equated to 1/10 borrowers or 4-5%.
As we continue to forge ahead amidst the aftermath of COVID-19, it’s a time for
re-growth and stabilization. The solution? “Try” to save more, spend less, and earn better. Easier said than done, but setting these goals will ultimately establish a stronger financial position!
*Nicole Gibillini – Global News
**All information correct at time of publishing and should be verified by the Purchasers and Sellers
