Are you feeling stressed out about the stress test?
You are? Let’s take a deep breath and cool off a bit. Let me tell you why the so called stress test shouldn’t be keeping you up at night.
First off, for the majority of borrowers nothing has changed. Mortgage lenders look at borrowers the exact same way they did before January 1, 2018.
They still care about things like:
- Your total income
- Your employment history
- Your personal credit and overall financial picture
- The property in question
How they determine how large of a mortgage you qualify for hasn’t changed either. The metrics they use to calculate your ability to debt service your mortgage are the same as they were before.
So what does the stress test actually mean then?
Good question. In the past, when your broker took your application they would input the interest rate of the mortgage into the system and the debt ratios mentioned above would be calculated and that was that. Simple right?
Well, because of the new B20 rules introduced this year, there is an extra step. Any borrower with less than 20% down payment is qualified at a higher interest rate, regardless of the term of the mortgage, fixed or variable.
If that’s you, that means that your debt servicing ratios are calculated again but this time adding 2% to your interest rate, and this is how the lender determines how much mortgage you can handle.
Take note here, I’m not saying your interest rate is 2% higher. You are just qualified at the higher rate to make sure you could theoretically afford it.
The basic idea is the Canadian government wants to make sure that people aren’t overextending themselves. As Canadians we have a tendency to take on more debt than we should, and that usually leads to trouble.
Not to make any predictions, but the 2% stress test is essentially a hint that the government believes interest rates will be higher in the future. If that’s the case, you’ll be happy you qualified for the higher rate now. That way when it comes time to renew or refinance your mortgage, you won’t find yourself falling behind or unable to make the higher payments.
The fewer people that lose their home or are forced to move the better.
So who does it affect?
The answer is virtually everyone. Unless you are working with a private lender, the stress test is the new normal. Time to get used to it.
When you’re talking with your broker, make sure you understand what your options and limits are and ask them to help you understand where you stand and what you can reasonably afford.
So that’s the stress test in a nutshell.
If you’re looking at renewing or refinancing your mortgage n the near future, fill out the form below and schedule a call with us! The Ardent Mortgages team would be happy to help you find the right mortgage product for your situation.