Stress Test Have You Feeling Confused?
Posted on Fri, 09 Feb 2018 in: General
There’s been lots of discussion around the new “stress test,” the OSFI put in place for 2018, but what does the test really mean, and how will it affect your mortgage application?
In finance, a stress test is used to describe a person’s financial ability to withstand changes. Specifically, can that person continue to afford their credit if their payment amounts or borrowing costs change over time.
The stress test is meant to be a cautious prediction of your future. It takes your current financial situation (income, assets, debt, liabilities), adds in your new mortgage commitments (payments, taxes, and heating), and sees if you can afford those new commitments if rates were to increase during your term.
The test uses the higher of two different options to determine whether you can qualify. The first is the Bank of Canada’s 5-year benchmark rate, which is currently 5.14%
The second is more complicated, it requires you to qualify at two percentage points higher than what your bank is offering. Currently, major banks have their 5-year fixed rate at 5.14%, but this is a posted rate, your real rate is likely to be lower thanks to your negotiation and the banks’ interest in winning your business. This means that you need to qualify at 2% above your negotiated rate, but only if this is greater than the BOC’s 5-year benchmark rate.
What does this mean for you? It’s likely that you will qualify for a smaller mortgage amount in 2018 than you would have in 2017, and as a result you will have to purchase a less expensive home.
If you already have a mortgage, the test does not apply if you are renewing with the same bank. However, if you would like to switch your existing mortgage to a different bank, that bank will need to qualify you with this new stress test. It’s possible that you won’t qualify for a mortgage that you already have.
It’s important to remember that this measure is meant to protect you from future financial risk, so while you may not be able to purchase the best home on the market, you may get something much better, peace of mind.
If you’re determined to purchase that dream home you can choose to get your mortgage from a private lender, which are not subject to this stress test. If you’re unsure what a private lender is, or how they’re different from a bank, stay tuned as that’s the subject of an upcoming Pinch Blog post.