What does the new STRESS TEST mean?
Meeting the requirements and getting approved for a mortgage are challenging, but securing a mortgage in 2021 can be even more due to the new Canadian mortgage stress test.
Many people are asking how will Canadians deal with the mortgage stress test in 2021 and beyond? How will this stress test continue to be a part of the home buying process? Let’s look at the new mortgage rules in greater detail and how it impacts home buyers in 2021. WHAT IS A STRESS TEST?
It’s a way of testing how you and your finances might be affected by financial turmoil, such as a loss of employment. When it comes to mortgages, it’s how you, as the potential homeowner, would cope with your mortgage payments in the event that your interest rate rises or you suffer a financial emergency. Simply put, the stress test forces you to come face-to-face with the very high costs of being a homeowner. All potential homeowners will now need to prove they can afford their potential mortgages based on their lender’s minimum “qualifying rate”. In order to pass the mortgage stress test, you’ll need to qualify at your contracted mortgage interest rate plus 2% or 5.25%. Since this new stress test, the majority of new homebuyers will be affording approx. 20% less. The new stress test rules have also made it more difficult for current homeowners to refinance or renew their mortgages. WILL THIS STRESS TEST IMPACT FUTURE BUYERS? Many applicants have already felt the wrath of the rules of the mortgage stress test and upset about how it affects buying power. As a result, the mortgage stress test rules have come under great scrutiny over the last year, and as such, there is mounting pressure on the OSFI to ease the rules.
While the intention of the rules was to ensure borrowers aren’t increasing their risk of defaulting and to slow down the housing market to ease skyrocketing prices, opponents suggest that the rules are simply too harsh.
Since the introduction of the new stress test rules, markets have certainly cooled down in many markets and interest rates have started to rise. Such a situation has prompted the OSFI to review the rules surrounding the stress test. What does that mean for future borrowers? While the OSFI has not shown any intentions on changing the rules, only time will tell if that change will come.