New mortgage rules introduced in 2018 require all Canadian home buyers to undergo a mortgage stress test – even if you make a down payment of 20% or more. Previously you would only have to stress test your mortgage if you made a down payment of less than 20%.
The 2018 mortgage stress test – some facts
If you’re buying a home the new mortgage rules will have a direct effect on how much home you can afford. You’ll have to prove that you could still make your monthly mortgage payments if interest rates were to rise in the future. Already have a mortgage? You’ll face a mortgage stress test if you refinance your home, take out a home owner line of credit, or switch to a new lender (but not if you renew with the same lender).
Understanding a little more about the stress test
Broadly speaking, the rules mean you may not be able to borrow as much as you would have been able to before the start of the year. If you’re house hunting, you may have to settle for a less-expensive home. If you’re renewing your mortgage, you may be forced to stay with your current lender. This allows you to side-step the stress test but it also means you can’t shop around for a better mortgage. And if you’re hoping to refinance, you may not be able to boost your loan by as much as you’d like – if at all.
Since those applicants will now be paying the mortgage back at a much lower rate of interest, it gives them the opportunity to borrow much more money. However, now that the posted rates are going to be used in the qualification process, the purchase price or refinance that you qualify for will be far less than the amount you currently qualify for. For some buyers, this drop in purchasing power could be in the range of 20% which makes a massive difference the type of home they buy, or where it’s located.
The way lenders decide what you can afford is based on a couple of main metrics, the gross debt service ratio (GDS) and the total debt service ratio (TDS)
The changes you’d have to make
If you have applied for pre-approval of your mortgage prior to Jan 1, 2018 and the approval comes in this year, the new qualifying rules will most likely apply to it. If this has happened or happens you may have to make some changes to your strategy and apply for pre-approval all over again but this time with the stress factor included. It also means that you will have to either increase down payment or restart the process of hunting for a new house that falls within the new restricted budget.
For any more information about the mortgage stress test, how it works and how it affects you and the mortgage you will be applying for, contact the experts at Luca Andolfatto at 613-541-9220 or through this online form.