Those entering into a mortgage will hear the words “mortgage stress test”. Those words may be enough to stress you out. After all, for some it might mean qualifying for a smaller mortgage than anticipated.
The stress-test applies to homebuyers, regardless of how much money they are putting down and is another hurdle to cross when looking to purchase a house. It’s an indicator that lets the lender know how much ‘stress’ you can handle when it comes to your mortgage payment.
If mortgage rates were to increase, can you continue to make the payment?
That is a question you should be asking yourself, too. And, it is why many will advise buyers to not purchase the most expensive home they can afford, but rather find a mortgage payment amount they are comfortable with, that leaves them room for emergency situations.
If you are considering purchasing a home, it’s time to get in touch and we can help you find the right mortgage broker who can help you get realistic about what you can afford and what type of purchase might be right for you.
It’s the best way to de-stress about getting into a mortgage.
What is the stress test?
The mortgage stress test is a federally regulated stress test for mortgages that is intended to lower the risk for lenders and borrowers should the economy or circumstances change. In other words, it’s a test designed to ensure homeowners can continue to afford their home should mortgage rates increase.
In July, the Bank of Canada lowered it’s qualifying rate for mortgages and the stress test by 15 basis points from 5.34% to 5.19%.
In a Global News report, Sherry Cooper, chief economist for Dominion Lending Centres, described the move as an “incremental positive psychological boost for buyers”.
She added, “it should also counter, in some small part, what’s been the slowest lending growth in five years”.
In a report published by CMHC, Residential Mortgage Industry, mortgage numbers decreased by 19% in 2018 while refinanced mortgages by the same lender decreased by 12%. While perhaps not the only reason for the decline in mortgages, the stress test which took action in 2018 is likely a major cause.
So the question becomes whether the dip in the stress-test qualifying percentage is enough of an incentive to push first wanna-be first time buyers into home-ownership? Or homeowners to move up the market?
Mortgage rate experts predict the reduction for the stress test could provide home buyers with approximately $2800 to $5900 more in purchasing power.
For easy math, let’s look at a $1-million dollar mortgage a buyer may have been able to qualify for before the introduction of the stress test in 2018. With the stress-test, their purchasing power is reduced to approximately $800,000.
The reduction in the qualifying rate isn’t enough to suddenly qualify for what you could have two years ago.
In the Lower Mainland where real estate prices are high, the stress test is stressing would-be first time buyers out. And, for some who are already in the market, the prospect of moving up is daunting. In fact, many are finding they would not even qualify for a lateral market move.
Especially in real estate markets like Vancouver and the Fraser Valley, the stress-test is just another burden in an already difficult market to penetrate.
For first time buyers considering a condo, lowering the stress test percentage may be the vote of confidence they need to ease them into the home-buying decision. Or, at least that’s the idea behind the move.
After all, paying rent can often be equal to, and in some cases more, than paying a mortgage.
For those entering into new home ownership, they should consider the stress test to help ensure they do not overspend on their home.
Can You Get Around the Stress Test?
Qualifying for a mortgage can be a stressful situation. That’s why it is important to chat with an experienced mortgage broker before you make any decisions or fall in love with a home.
The stress test has become the most ‘stressful’ part of house-hunting. In fact, many buyers are more concerned with the stress test than actual interest rates or their mortgage amount.
Mortgage brokers can help buyers get creative and realistic with their expectations. For instance, perhaps the numbers work to purchase a condo and use that as a stepping stone into the market. Or, maybe a different neighbourhood is more realistic.
Plus, not all lending companies are regulated by the government rules and therefore, do not need to run the stress-test to agree to a mortgage.
Buying a Home Doesn’t Need to Be Stressful
July’s news regarding the stress can be seen as a small incentive to help buyers ease into the real estate market. For some, it might mean they can afford a home or condo when previously they couldn’t. Or, maybe they can get into a neighbourhood or area that previously was just slightly out of reach.
Buying a home doesn’t need to be stressful and home buyers need not stress out about the stress test.
In fact, before getting stressed, it’s important to talk about your options with an experienced mortgage broker and real estate agent. There may be options you’ve not yet thought of. Plus, they can help set you on a plan for home ownership, giving you something to look forward to and plan for, rather than simply think you don’t qualify.
In other words, don’t be stressed by the stress test. And, think of the small qualifying rate dip as an incentive.
If you’re considering moving into the real estate market or moving up, the Taylor Team can help you become buyer ready, put you in touch with the best mortgage brokers and help you make an attractive offer in this fast-paced real estate market. Contact The Taylor Team of Sutton WestCoast Realty by calling or texting 778-316-4290.