Reading the news about different real estate markets across the country, one common trend is surfacing, stating the stress test has gone too far and has delivered underwhelming consequences.
We thought we’d revisit what the Stress Test is all about.
Implemented to control the amount of personal debt people take on so that we don’t get in over our heads, the stress test is designed to see how you could afford your current mortgage in the event that your income situation changes. Federally-regulated banks want to be secured that you could still afford your mortgage if interest rates were to rise or if you were to experience a financial change.
To qualify for a mortgage, you will now be subjected to see how you could afford a mortgage at your lender’s minimum qualifying rate which refers to the Bank of Canada’s five-year benchmark rate, or their contract rate, plus two percentage points higher (whichever is higher). The result is, this prices you in a different bracket for the price of home you can afford.
When it comes to actual numbers, this could mean the difference of several hundred dollars each month being applied to your mortgage on a principal that differs by $100,000, or more. After you consider things like property taxes, home-related costs, financial emergencies, strongly consider if the mortgage you want to achieve is truly realistic and safe. You could opt out of using federally regulated banks and turn to alternative lenders who are exempt from these rules simply because alternative lenders are funded by themselves. However, that being said, though the risk of these stress tests is that people will divert business to other lenders, places like credit unions already charge higher interest rates to begin with. So, though perhaps the lure of not having to qualify is attractive, you may end up paying more in the long run.
According to a recent CIBC article, the stress test has resulted in $15-billion loss in new mortgages, and hence the debate is out there more and more regarding whether this stress test is still needed and or perhaps if it should be modified. Regardless, it isn’t going anywhere anytime soon but we’d be keen on hearing how the stress test has affected you.