In early 2018, legislative changes were introduced to Canada’s mortgage and housing rules that require all Canadian home buyers who are borrowing from a federally regulated lender to pass what is called the Mortgage Stress Test. Previously, only borrowers who had less than 20% down were required to pass a stress test.
Why does this matter to you?
If you are buying a home, these new rules will directly impact how much you can afford to borrow and ultimately, how much you can spend on a home.
The government’s goal of stress testing is to ensure you can afford to continue to meet your monthly debt obligations should interest rates rise. As such, mortgage approvals are now based on either the Bank of Canada’s 5-year benchmark rate or at your contracted rate plus 2% (whichever is higher).
When numbers are calculated, many home buyers will see that the stress test will reduce their borrowing capacity by a minimum of 18.5% — and the bigger the gap between your pre-approved interest rate and the stress test rate minimum (2% higher), the more your borrowing capacity will be impacted. Be sure to get “stress test” approved before getting too far into your home search process.
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