If you’re planning to get a mortgage in Canada, you need to be aware of the mortgage stress tests that are now required. The mortgage stress tests are designed to ensure that borrowers are able to handle higher interest rates in the future, and that they can make their payments when the economy takes a downturn.
What is the mortgage stress test?
The mortgage stress test requires mortgage applicants to qualify for a mortgage at a higher interest rate than the one they will actually be paying. This means that the buyer must be able to afford the payments even if interest rates were to rise. The mortgage stress test was introduced in Canada in 2018 and applies to all borrowers, regardless of the size of the down payment.
How does it work?
The mortgage stress test requires borrowers to qualify for mortgage payments at the higher of either the Bank of Canada’s five-year benchmark rate or their lender’s offered rate plus two percentage points. This means that if the Bank of Canada’s five-year benchmark rate was 4.64%, the borrower would need to be able to make payments at a rate of 6.64%, even if their lender was offering them a rate of 3.64%.
What are the implications?
The mortgage stress test has had a significant impact on the Canadian housing market. Because borrowers must qualify for a higher interest rate, it means that they are able to borrow less money for their mortgage. This has led to a decrease in the number of homes being sold, as buyers are not able to afford as much as they could before the stress test was introduced.
What can you do?
The best way to prepare for the mortgage stress test is to make sure that you have a good credit score and that you have saved up enough money for a larger down payment. This will help you qualify for a lower interest rate, and will also help you to be able to afford the payments if interest rates were to increase in the future.
In conclusion, the mortgage stress test is a requirement for all mortgage applicants in Canada. It is designed to ensure that borrowers are able to make their payments even if interest rates were to increase in the future. To ensure you can pass the stress test, make sure you have a good credit score and have saved up enough money for a larger down payment.
