Mortgage stress test Canada

man thinking about Mortgage stress test Canada
Mark Price
October 17, 2022
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In 2018, the Canadian Mortgage Stress Test became mandatory for all financial institutions in the country that fall under federal regulation. An overheated real estate market necessitated the introduction of this check to ensure that homebuyers were qualified to take out mortgages. As a result of this stress test, many borrowers have been disqualified from receiving conventional mortgages and are now forced to explore alternative financing.

What is the Canadian Mortgage Stress Test?

As of 2018, the Canadian government required all mortgage applicants to demonstrate that they could still make their monthly payments even if interest rates increased.

Asa precautionary measure, the Canadian mortgage market implemented a stress test for borrowers and lenders. Borrowers must show they would be able to make their mortgage payments even if interest rates were 2% higher than than the benchmark rate, a rate set by Canadian banks.

This had two effects. It either reduced the amount of mortgage that could be borrowed, and it caused some new first time home buyers to not be able to purchase their first home.

The mortgage application process in 2021

The availability of mortgages has diminished. For loans to be approved in the past, borrowers only needed to meet minimum income and credit requirements. Getting a mortgage to purchase or refinance a property these days can be quite difficult, especially with the introduction of the stress test. There are a lot of strict qualifying standards in Canada that borrowers must pass.

There is a cap on how much of a borrower's income can go toward housing expenditures, and that cap is 39% which includes the monthly mortgage payment, property taxes, and utility payments. One last factor to consider is how much of one's salary goes toward paying off debt. Their total monthly outlays after factoring in mortgage or rent, automobile or credit card payments, and any other debts or payments, as opposed to their monthly take-home salary. A total of 44% or less is required for approval.

Canada's ability to borrow money is severely hampered by this stress test. Consequently, prospective purchasers will need to increase the size of their down payments, reduce their overall debt levels, or opt for less expensive homes. There could be complications with renewing a mortgage if the borrower switches lenders in the middle of the process. The borrower's new mortgage lender must redo the stress test, and the results will depend on how their financial status has changed since the original run. Even if the borrower remains with their existing servicer, the stress test may be repeated at the servicer's discretion.

It's true that getting a mortgage involves a lot of hoops to jump through, but that's because lenders want to make sure borrowers can handle their debt even if interest rates rise, their debts multiply, or their income drops.

Unfortunately, the Canadian Mortgage Stress Test is one of the requirements for these Home Equity Lines of Credits (HELOCs). Borrowers need a high credit score, consistent earnings, a low debt-to-income ratio, and a passing stress test score to be approved for a home equity line of credit (HELOC).

Does the Stress Test apply with Reverse Mortgages?

Reverse mortgages in Canada do not have the same stringent conditions for qualification as a home equity line of credit (HELOC).

You don't need a high credit score or a substantial income to qualify for a reverse mortgage, and because there are no monthly payments involved, the Canadian Mortgage Stress Test doesn't apply.

If you are eligible for a reverse mortgage, you can borrow up to 55% of your home's worth without having to make any payments toward the loan principal until you either sell the property or pass away.

For seniors, there is a wide variety of unexpected costs that may necessitate a loan. Access to cash can be a limiting factor when trying to accomplish goals like leaving a living inheritance to loved ones, paying for medical expenses or in-home care, making necessary home improvements, or taking a long-awaited trip.

When borrowing restrictions in Canada make it challenging to secure a standard mortgage loan or HELOC, especially if one does not have a stable source of income a reverse mortgage could be the best solution here.

If you have any questions about whether a Reverse Mortgage is right for you, feel free to give us a call at  250.212.4424 or contact us here here.

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Mark Price
Director, Mark Price Mortgages

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