What is a Mortgage Stress Test?
What is a Mortgage Stress Test and How Does it Affect You.
A mortgage stress test is a recent measure introduced by the federal government to ensure that Canadians who are applying for mortgages are able to afford their monthly payments. The mortgage stress test was introduced in response to the 2008 financial crisis, when many borrowers were unable to pay off their mortgages because they had taken on more than they could afford. To avoid this from happening again, the federal government has now put in place stricter guidelines for lending institutions.
Here’s how it works: A borrower who wants to take out an uninsured mortgage (one that doesn’t qualify for CMHC insurance) will have to pass a standard qualifying rate stress test or be declined. This means that even if you can afford your mortgage payments based on your income alone, you might not qualify for an uninsured mortgage if rates go up significantly. How does this affect you? Read on!
What is a Mortgage Stress Test?
A mortgage stress test is a recent measure introduced by the federal government to help the country avoid another financial crisis. In 2008, many people were unable to pay off their mortgages because they had taken on more than they could afford and the situation worsened when the housing market collapsed. To avoid this from happening again, the federal government has put in place stricter guidelines for lending institutions.
When you apply for an uninsured mortgage (one that doesn’t qualify for CMHC insurance) your application will be subjected to a stress test. This means that if you can afford your monthly payments based on your income alone, you may not qualify for an uninsured mortgage if rates go up significantly.
How does this affect you? Read on!
How does it affect you?
With the introduction of the stress test, it’s now more difficult for Canadians to qualify for certain mortgages. This can be problematic if you’ve been saving up for a large purchase or if you don’t have any other options.
To give an example, let’s say that you want to take out a mortgage loan with a value of $400,000 and an amortization period of 25 years. Your monthly payments would be $2,304 at today’s qualifying rate (5.14%). However, if rates go up just one percentage point to 6.15%, your monthly payments (on the same mortgage) will jump to $2,631. That means that your mortgage payment would now exceed 38% of your income!
It’s important to note that not all lenders are required to do this test; some lenders will offer uninsured mortgages without this requirement. You should ask about their policies before applying for a mortgage.
What are the pros and cons?
Pros:
– The Canadian government is working to ensure that Canadians can afford their mortgages so they don’t default on them.
– This protects homeowners and the housing market in the event of a major economic crisis.
Cons:
– You may not qualify for an uninsured mortgage if you’re planning to buy a property soon.
– If you’re planning to buy, you’ll have less flexibility with your monthly payments because of the stress test.
Conclusion
You’ve probably heard of mortgage stress tests before, but what are they and how do they affect you?
Mortgage stress tests are designed to ensure that you can still afford to pay your mortgage if interest rates go up or your income goes down. If you can’t, the stress test deems you ineligible for the home you’re looking for.
The test is fairly straightforward, but it’s important to understand the pros and cons of the process. It’s important that you don’t just say “yes,” to a mortgage just because it seems like the only option. With a little bit of research, you can understand how these stress tests will affect your finances and decide if it’s the right choice for your lifestyle.