Many people are asking me how the new mortgage stress test rules affect them. Is it just for purchasing a home? What about at renewal time or if you want to refinance your current mortgage. What’s the deal? And can you please explain it in a way we can understand?
Sure can! For Starters:
The sooner we stop talking about ‘old rules’ and ‘new rules’ the better.
We refer to the old rules now, only because some of you are in a transition period, where you might be buying or refinancing your home now — for technical reasons you can still qualify under the “old rules” — under the rules in place in 2017.
Last time I’ll say it (maybe) the ‘new rules’ are basically, current mortgage borrowing rules of qualification — in effect since January 1, 2018. And are you ready for the big reveal? Mortgage lenders look at all borrowers the exact same way they did before!
Nothing has changed!
They still care about your income and employment, your personal credit history; your overall financial picture; and of course, the property itself.
When they determine how much mortgage you qualify for, they still only want no more than 39% of your gross income to go towards your mortgage payment, property taxes, heating costs and maintenance fees, if any. This is called your gross debt service ratio. (GDS)
This has not changed.
Then they also factor in other monthly obligations like care payments, student loans, credit cards, other mortgages, etc., and they still want no more than 44% of your gross income to go towards everything. This is called your total debt service ratio. (TDS)
This has not changed.
So why is everyone so stressed out about these so-called changes?! Let’s circle back with a quick refresher on the test itself.
The Stress Test – what is it any way?
In days gone by, they would input your mortgage interest rate into the application, and the ratios would be calculated and that was that. Oh… the good old days! If your term was less than five years, or if you wanted a variable rate mortgage, they were actually already doing a stress test. It was just not really talked about much at all.
Then in the Fall of 2016 the government introduced the next phase of stress testing — any borrower with less than 20% down payment would be qualified at a higher interest rate, regardless of term and even it was fixed, not variable.
The government is concerned with rising interest rates. They want to be sure you qualify for your mortgage not only today — but also in the future IF MORTGAGE RATES HAVE RISEN A COUPLE OF PERCENT by that time.
So now they ratchet up your mortgage rate by 2% in the application, and they crunch the numbers again. And the ratios that are calculated this time are the ones they use to determine how much mortgage you qualify for today. THAT is the so called stress test.
Simply put, a test of your finances to see how they hold up under the spectre or threat of higher rates down the road when your mortgage matures.
The not-so-stressful result
Plain and simple, the stress test is intended to protect us from overextending ourselves. To avoid borrowing to the absolute max — with no wiggle room.
We’ve all heard the stat that more than 40% of us feel we are screwed if we even miss one pay check. (In an online survey, conducted by Ipsos in December for insolvency trustee MNP Ltd., nearly half of the Canadians surveyed — 48 per cent — said they are now $200 or less away from not being able to meet their monthly financial obligations.)
Holy cannoli Canada, that is a mighty thin margin!
So the intention here is to give us a buffer. Whether we want one… or not.
So, who does it affect?
Pretty much everyone. It affects all mortgage borrowers, unless you are dealing with private lenders. Whether you are buying, refinancing or switching lenders at mortgage renewal time, the stress test is now a way of life. The new normal of borrowing, we might as well get used to it.
And… since, the market has become quite fragmented, asking the question “what’s your best interest rate” is almost pointless — because there are several, depending on what type of borrower you are. Instead you need to understand what your options and limits are — especially BEFORE you make a major decision.
In other words, proceed with thought and foresight, don’t spend the reno money, or lift your condition of financing clause until you know you are qualified properly for a mortgage — under the current rules.
And now that you’ve got this whole stress test business figured out, it might be wise to brew a nice cuppa’ or do some yoga to calm back down 🙂