What do You Need to Know about the Canadian Mortgage Stress Test?

No one can deny the fact that the mortgage stress test was first introduced in Canada to overall help Canadian property buyers and homeowners get their homes at the lowest mortgage rates. After the fall of mortgage rates in Canada, the federal government started revising certain mortgage dealings and accesses, especially mortgage stress tests.

In recent years, the federal government of Canada introduced new rules such as the B-20 Guidelines for mortgage rate revision.

These rules, which apply to all federally-regulated financial institutions, demand that a “stress test” be used for every mortgage application. This includes purchases involving down payments higher than 20% or refinances with low loan-to-value proportions. The only exclusion applies when you renew the same mortgage with the same financial institution.

Why was the Mortgage Stress Test Created?

It is a well-known fact that homeowners & property buyers in Canada have bounteous options to connect with the mortgage lenders and brokers, but sometimes people are seeking for the online tools and trusted professionals who have dived into the mortgage dealings accordingly.

As the mortgage rates in Canada were revised, the new mortgage rules apply to the different properties under the government rules and regulations. Some mortgage lenders still believe that the interest rates have been at historic lows that can only go up; the government wants to make sure you’ll still be able to pay for your mortgage payments when rates eventually rise. Otherwise, if you can’t afford higher expenses in the future, you might lose your home.

How does the Mortgage Stress Test Work?

The mortgage stress test is designed to guarantee that people with a mortgage are still able to make payments under the low Canadian mortgage rates.

Before the stress test, candidates would qualify based on the actual mortgage payments that they make. This new payment is based on either the interest rate of your mortgage plus 2% or the Bank of Canada’s standard rate, which was around 5.14% as in April 2018. People will need to understand the rising concerns over the mortgage stress test that has been effective for making the mortgage payment. Working on the mortgage payments with the stress test analogy has overall lowered the amount your bank can now offer you. Many people will now qualify for around 15-20% less money than earlier.

How Does The Bank Determine What I Can Afford?

There are two leading figures banks use in this calculation. First is Gross Debt Service Ratio, which is the percentage of the borrower’s pre-tax income that will cover housing costs [including mortgage, heat, and property taxes], and it should be maintained at the steady rate of 32% overall. Then there is Total Debt Service Ratio, which is an outstanding personal debt including mortgage, car loans, credit card debt, lines of credit, etc. and should be no more than 40% of pre-tax income.

Wrapping Up 

 Hence, it is on you to always seek the help of the mortgage stress test when you are taking the option of purchasing properties in Canada. If you are seeking more information on mortgages, loans, and insurance in Canada, then feel free to connect with RateShop.ca today!