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New Changes to the Canadian Mortgage Stress Test: What You Need To Know
Buying a house is easily the biggest decision, and the biggest purchase that many people will make in their lifetime, and often, the hurdles to overcome can be discouraging, to say the least. To purchase a home currently in Canada, you must pass the Canadian Mortgage Stress Test. This test is conducted for the purpose of ensuring that even with financial emergencies or increases in interest rates, buyers will still be able to afford to pay for the mortgage they have. On April 6th, 2020 the rules around Canada’s Mortgage Stress test will become more dynamic, and are thought to deliver positive change, and increase purchasing power in the housing industry. Here is what you need to know:
The Stress Test was created to confront the household debt issue in Canada with the goal to prevent consumers from taking on more debt by assuming a mortgage that is more than they can handle. In 2018, all buyers in Canada, including those uninsured buyers who put a minimum 20% down payment on their investment, who applied for a mortgage from a federally-regulated lender had to go through the OFSI Mortgage Stress Test. This Stress Test was designed to ensure that buyers would be able to make their mortgage payments, even when interest rates increase. Unfortunately, this test affected homebuyers negatively, and many opted out of purchasing once discovering that their finances would be dissected with a fine-tooth comb, and tested at higher interest rates to qualify.
The new guidelines for the Canadian Mortgage Stress Test will include only buyers with insured mortgages, which typically includes those who are putting in less than 20% for a downpayment. The rate that lenders will utilize when conducting their assessment will be the greater of the borrower’s contract rate or the weekly median five-year fixed insured mortgage rate, plus 2%. This new rate can translate into the savings of thousands of dollars for home buyers and will allow it to follow along with the fluctuations of the economy, ultimately giving new buyers some long-awaited breaks and more purchasing power.
The benchmark rate set by the Big 6 Banks has noticeably been kept high, making the current stress test unnecessarily difficult and harder for some buyers to qualify for better mortgages. In February 2020, the stress test rate for insured mortgages was 5.19%; If the changes for the new stress test were in effect, the rate would have gone to 4.89%, allowing borrowers to save more or qualify for larger mortgages. The new guidelines being introduced in April will be a relief for many people who have waited on the cusp of meeting these stress test standards. For questions, concerns, and inquiries on how the new stress test guidelines will affect you, or if you are looking to purchase a home this spring, contact us today to see the options available to you in the midst of these dynamic changes.
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