There is a stress test factor for all mortgages in Canada, even if you’re putting down a 20% or more down payment for your house. You would have to follow the stress test mortgage parameters to ensure that you’re eligible for the house mortgage.
The stress test is basically a proof that you can afford your mortgage, based on your current financial scenario and other parameters. When you apply for your mortgage and your interest rate is provided to you, the stress test will add 2% or reference 5.25% (whichever is higher) to check if you can afford the payments. If you can also be approved for the stress test interest rate then you can be approved for the interest rate provided.
Here’s when you need to take a stress test
You would need to clear a stress test for both insured mortgages and uninsured mortgages so that you’re able to prove that you can make payments on your mortgage.
Buying a new home
When you’re taking out a mortgage loan then your gross debt service, income, and down payment will be the key factors. Through the minimum qualifying rate, the financial institutions are able to check whether you’re able to make the mortgage payment on time at a higher rate.
Changing lenders
When you’re changing lenders, then your new lender will be able to check the total debt service, the GDS, and other parameters. As per the rules set by the Government of Canada, you will have to clear the stress test for the new lender as well so that you’re able to ensure that you can make mortgage payments.
Refinancing on a mortgage
Refinancing will require a complete analysis of your income, debts (such as car payments, loans, etc.) and other factors. Federally regulated lenders will also have their own internal parameters depending on the mortgage rate provided. You would have to pass the stress test in this scenario as well.
HELOC
With HELOC being a secured type of credit, it is vital to get a stress test passed when you are applying for HELOC. A HELOC combined with a mortgage will have a qualifying rate, which will have a stress test attached to it.
How do you calculate the stress test scenario?
The reason for the stress test in Canada is to ensure that borrowers are able to make payments as per the outlined rules. You need to apply the fixed rate of 5.25% or opt for the bank rate + 2% and check whichever is higher. From there you can apply the mortgage stress test calculator functions to figure out your monthly mortgage payment.
How would changes in a mortgage stress test affect me?
If you have a household income of around $200K and you make a down payment of around $100K, then per an interest rate of 5.34%, you can have a mortgage affordability of around $793K. Any changes to the stress test qualifying rate will impact your affordability, which will eventually raise your monthly mortgage payments.
Here’s what you can do if you don’t pass the stress test
You can follow these best practices if you are unable to clear the stress test. You can always reapply to qualify for the mortgage, which can help you get a better idea of how the interest rates will affect your mortgage scenario.
Talk to a broker
A broker can help explain what the mortgage stress test means sot hat you’re able to figure out what the right approach will be. The broker can help you understand your debt service ratios, debt service TDS ratio and debt service GDS ratio, to help improve your outcomes.
Lower property value
If you have a higher gross debt service GDS and lower income then opting for a lower property value can help in some cases. You can choose a lower priced house to start your mortgage process and settle into a comfortable house.
Improved credit score
With a higher credit score report, you can improve your credit worthiness which can help in qualifying for a lower rate. This can help in lowering the overall monthly payments, which is why waiting for a boost in credit score can be a potential approach.
Higher down payment
While the minimum down payment is a key metric, you can still get a lower monthly mortgage payment structure if you increase your down payment. This can help you through the mortgage pre approval process, with the right interest rates to help you qualify for the stress test.
Higher income
By increasing your income or having a co-signer for a mortgage, you’re able to show higher overall income levels which can help you clear the stress test. With the higher income levels, you can show that you’re able to make mortgage payments.
