Under the stress test changes, the new qualification rate that mortgage lenders have to use is 2% plus your mortgage rate or 5.25% - whichever is greater. The rate is up from 4.74%. This new change applies to both insured and uninsured mortgages - including refinances. Although the increase will not impact everyone, it will affect people who are on the edges of qualifying to buy or refinance their homes.
Purchasing a Home
When buying your next home, your purchasing power could be lowered by the new stress test - especially if you are at the top of your debt ratios. Your debt ratios are the amount of your pre-tax income that goes toward your mortgage, property taxes, heat and other debts - like your student or car loans.
Refinancing Your House
The new stress test also impacts people looking to refinance their property. In the same way that you must have room in your debt ratios to buy a house with a mortgage, you must have room to add money to your existing mortgage or refinancing your home with a different lender. For people who can not afford to move their mortgage to a new lender due to the new rules, you may end up with a higher rate upon your renewal. Often mortgage renewal rates are higher than what you see posted on a lender’s websites or ads. People who cannot move their mortgage because of the new mortgage stress test will end up with a higher rate, as they can not shop around for a new term with another financial institution.
How to Increase Your Purchasing Power?
There are two common ways you can increase your purchasing power. The first is to have a more significant down payment while purchasing your house. A larger down payment increases the amount you can afford to pay for the house without getting a larger mortgage. Extra downpayment funds must come from yourself, or they can be gifted to you by a family member - not borrowed. Your lender is going to require a gift letter if you are getting help from family.
You can also increase your mortgage amount by having a co-signor added to your mortgage. The co-signors income and debts will be added to your mortgage application. Increasing the total income on your application will increase the maximum amount a lender will give you - if you have the down payment to support this increase.
Why Does Canada Have a Mortgage Stress Test?
Today’s mortgage rates are at historic lows and will likely increase in the future. These low rates are helping fuel the prices of homes across the country. Having an increased rate is intended to both cool Canada’s hot housing market and protect purchasers in the future. The Government of Canada is trying to ensure that people can afford their house if rates go up before your next mortgage renewal. Although mortgage rates have been low for over ten years now, in the 1980’s mortgage rates were above 20% - so Canadians buying or refinancing a home should be prepared for higher mortgage rates at some point in their lifetime (hopefully not 1980’s rates).
How Can Worthy Financial Help?
We can work together to create a plan for you to purchase your first home. Most importantly, we want to ensure that even if you qualify for a new home, you do not end up house poor or build-up “bad debt” due to increased pressures on your budget. Book a Free 15 Minute Consultation to discuss how we can help you today.