Want to know how to avoid the mortgage stress test and make your homeownership dreams a reality? Keep reading to learn more.
What Is A Mortgage Stress Test?
A mortgage stress test is a tool used by lenders to determine whether a potential borrower would be able to afford their mortgage payments if interest rates were to rise or their financial circumstances were to change. The stress test involves assessing the borrower’s ability to make their mortgage payments at a higher interest rate than the one being offered on their mortgage.
This helps lenders ensure that borrowers will continue making their mortgage payments even if interest rates go up or their income decreases.
How Does A Mortgage Stress Test Work?
It is calculated as your rate + 2%, or 5.25 percent (OSFI qualifying rate), whichever is greater.
Here’s a quick example of a mortgage stress test calculation:
Let’s say you apply for a mortgage at a 4.00% rate. The lender would evaluate you as if you were repaying the mortgage at 6.00% (4.00% + 2%) since 6.00% is higher than 5.25.
Even if you want to take up that $600,000 mortgage at the bank’s offered rate of 4.0%, you will need to show that you can afford a mortgage payment of $3,000 per month (at 6.0%), even though the offered mortgage payment (at 4.0%) would’ve been $2,000.
Drawbacks Of The Mortgage Stress Test
As you can see, a mortgage stress test may make it more difficult for some borrowers to qualify for a mortgage, even if they would be able to afford their monthly payments at the interest rate they are being offered.
This could potentially prevent some borrowers from being able to buy a home. Or could require them to make a larger down payment in order to qualify for a loan. Head over to our mortgage calculators if you want to know the estimate of your mortgage payments.
Another potential disadvantage is that the stress test may not accurately reflect a borrower’s ability to afford their mortgage payments, especially if their financial situation is likely to improve in the future.
This could result in some borrowers being unnecessarily denied a mortgage, or being required to take on a smaller loan than they would be able to comfortably afford.
Now, the question is, can you avoid a mortgage stress test?
How To Avoid The Mortgage Stress Test
The OSFI requires banks in Canada to implement the mortgage stress test. However, provincially controlled alternative lenders and credit unions are not obliged to do so. This may allow potential purchasers to avoid the requirements.
BUT, it’s important to make sure you work with a trustworthy lender that has your best interests in mind. Be careful not to put yourself in a situation where making your mortgage payments might become challenging just by avoiding the mortgage stress test. It might jeopardize all your payments in the long run.
Working with a qualified broker is the best way to go with any of your mortgage needs. Mortgage brokers are experienced professionals trained to help you find the best mortgage product for your needs. They can help you compare different lenders and mortgage products.
Mortgage brokers are also familiar with a wide range of lenders and mortgage products. They help you find options that you may not have been aware of otherwise.
Finally, mortgage brokers are regulated by the government. These are professionals required to follow strict rules and guidelines. You can be confident that they will provide you with honest, reliable, and professional advice.
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