Are you ready to buy a home? If so, you may be wondering about the mortgage stress test that was introduced in early 2018. While there’s been a steady stream of news stories on the subject, many homebuyers are still unsure about how these recent rule changes will impact them. In this post, we’ll provide a breakdown of the OFSI mortgage stress test. We’ll also tell you what it means for you as a homebuyer.
What is the stress test, and why was it introduced?
Put simply, the mortgage stress test exists to help ensure that homebuyers can continue to meet their mortgage payment obligations. Sometimes mortgage rates rise. When this happens, it may become more difficult for some borrowers to make their regular mortgage payments.
To help reduce the likelihood that buyers receive mortgages they can’t afford (and reduce home foreclosures), the Superintendent of Financial Institutions (OFSI) introduced the mortgage stress test. The test is essentially a set of guidelines that lenders must use when they’re assessing how much financing a borrower can receive. Here’s how it works.
Interest rates
When issuing a mortgage, lenders must determine whether a homebuyer can continue to make their payments if interest rates rise. Under the most recent lending guidelines, there are two factors they have to consider.
The five-year benchmark rate
This number represents the rate that lenders must use to qualify borrowers who are looking for a variable rate mortgage or a term of under five years. The most recently reported five-year benchmark was 5.34 per cent. This rate has risen several times in the last year and a half, but it’s remained unchanged since May of 2018.
A borrower’s approved rate plus two percentage points
This number is simply the mortgage interest rate that a borrower is approved for, with two percentage points added.
Under the stress test rules, whichever rate is higher (the five-year benchmark or a borrower’s approved rate plus two points) is the standard a homebuyer must meet.
Who is impacted?
Previously, the rules above applied only to buyers who made downpayments of less than 20 per cent. The stress test mandates that they now also apply to buyers who make downpayments above this threshold. It’s also important to note that only financial institutions that are federally regulated have to use these guidelines. If you opt for a lender that doesn’t fall into this category (such as a credit union), they may not apply to you.
Other relevant lending criteria
Of course, there are other factors that lenders must take into account when they’re determining how much mortgage financing you’ll qualify for. One of the most important considerations is your income. You can only put 32 per cent of your monthly income toward housing costs—including your property taxes and utilities. Lenders will also consider your debt-to-income ratio (your monthly debt payments divided by your gross monthly income). Anything in the mid 30s is considered reasonable. This number shouldn’t exceed the low 40s when you’re applying for a mortgage.
The bottom line: lenders will look at your overall financial health when evaluating your mortgage application.
To learn more about how the stress test could impact your purchasing power, speak to a qualified financial professional. Once you know how much home you can afford, an experienced real estate agent can help you find a variety of housing options that work with your budget and preferences.
For over 30 years, our clients have trusted us to minimize risk, offer unbiased opinions, and ensure their best interests are served. Contact us today to talk about your needs, by emailing us at info@christensengroup.ca or calling us at 416-441-2888 ext. 772.
