How Does the Financial Stress Test Work in Canada?
Since January of 2018, Canadians applying for a mortgage with a federally regulated lender have had to first pass a financial stress test before they could be approved. This has left some prospective homeowners feeling that buying their dream home may now be out of reach. It has left others feeling confused about what exactly that would mean for them.
The stress test was introduced by the federal government to ensure that those who received mortgages would still be able to make their payments should interest rates increase.
How does the mortgage stress test work?
When applying for a mortgage with a federally regulated lender like one of the major banks, home buyers must qualify for a minimum rate. For those without default insurance (who have made a down payment of 20% or more), the minimum qualifying rate is the higher of 2% more than the rate being offered or the Bank of Canada’s five year benchmark. For those with default insurance, the minimum qualifying rate is the higher of either the rate being offered by the lender or the Bank of Canada’s five year benchmark.
How does the financial stress test work with mortgage renewal?
If you already had a mortgage in place with a federally regulated lender prior to the financial stress test being introduced, you are not required to pass the test in order to renew with your current lender. If however you wish you change mortgage providers at the time of renewal, you will be required to pass the test to renew with a different federally regulated lender.
What happens if I cannot pass the mortgage stress test?
Since the financial stress test is only required by federally regulated lenders, you always have the option to work with a provincially regulated lender such as a credit union or an alternative lender for whom passing the mortgage stress test is not a requirement. Consulting with a professional mortgage broker is the best way to ensure that you find the lender that is right for you.
Your other option is to apply for a lower mortgage amount so that you are able to pass the test. This may mean you’ll have to purchase a less expensive home than you originally planned.
If you have further questions about how the mortgage stress test works in Canada or are considering applying for a mortgage, then contact Matrix Mortgage Global today.