Why do you need mortgage stress test?
BY: DAREN ANGELES
In the financial world, the Mortgage Stress Test is a way of considering the worst-case scenario for all types of investments. In other words, it’s about determining exactly how much you could afford. When it comes to mortgages, a stress test will determine the risks that come with each loan application. The mortgage stress tests were normally applied to insured mortgages, in which the borrower will have to put down less than 20% of their down payment.
But in January 2018, a new stress test came into play and all borrowers, including previous ones, must be subjected to this new test.
The New Stress Test :
The new stress test will automatically deduct your borrowing capacity by a minimum of 18.5%. The stressed test will further reduce or impact your capacity, depending on the gap between your pre-approved interested rate.
In this case, buyers who are shopping on the higher end of the budget, and buyers who spend high percentages of their gross incomes on housing expenses will be at risk. The stress test effect will be lessened for the buyers who are purchasing below their pre-approved budgets, and buyers who expect to spend less than 35% of their income on housing and mortgage cost.
The minimum qualifying rate for consumers getting uninsured mortgages-borrowers with a down payment of 20% or more, will be the greater of the Bank of Canada’s five-year benchmark rate (presently 5.04%) or 200 basis points above the mortgage holder’s contractual mortgage rate.
If you have already been pre-approved, there’s an easy formula to figure out the approximate reduced borrowing power capacity under the new stress test regulations:
Reduction in buying power = (current pre-approval * minimum reduction of 18.5%)
Increasing borrowing capacity :
Your borrowing capacity is more towards your Gross Debt Service (GDS) and your Total Debt Service (TDS) ratios. Any increase in these ratios will affect your borrowing capacity by decreasing it.
For example, putting down a higher payment will decrease your mortgage debt and your monthly mortgage costs resulting in a lower GDS/TDS ratio, thus increasing your borrowing capacity. You could also have an increase in your household income or reducing your current debt payments (car payments, credit cards, etc.) could take you to have a larger borrowing capacity.
Income needed to pass the stress test:
According to the Canadian Real Estate Association (CRSA), the average price of a home in Canada is just below $500,000. Now that the new stress test is applied, target buyers now have to prove that they will be able to catch up with their bills even if their mortgage rate rose to 0.2%
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