The mortgage stress test. Most home owners shudder a little when they hear that phrase. And it’s no wonder. About 10% of would-be mortgage owners who were able to get approved for a mortgage before the stress test was introduced can no longer get approval.
The stress test was brought in at the start of 2018 by OSFI when Canada was experiencing a rising interest rate environment and the government wanted to cool certain hot markets (GTA and GVA). The part of the test most people focus on is this: it calculates one’s ability to handle either 2% above one’s actual mortgage rate, or the Bank of Canada’s five-year average posted rate, whichever is higher.
The Bank’s overnight rate (which impacts mortgage interest rates) went on an upward trend for 15 months but in October 2018 all movement came to a screeching halt. Consumers and the Canadian economy couldn’t handle yet another bump in their interest rates. The country has breathed a tentative but collective sigh of relief. Variable rates are now a very attractive option again and fixed rates are also getting attention due to competitive spring/summer pricing being offered by lenders left, right, and centre.
What’s coming next? There isn’t reason yet to believe that the stress test is going away any time soon, but it is a possibility since, according to some, the test did its job better than intended. And with a federal election coming up we’re bound to see more than one incentive promised to potential home owners. Rumour has it we may see the return of the 30 year amortization period. Presently the longest amortization period offered to new buyers is 25 years. The added 5 years would make it easier for buyers to get mortgage approval and give them access to higher amounts to borrow.
Pass the test
Until we know exactly what is in store for the future, buyers still have to find a way to pass the stress test. If you haven’t been able to pass the test on your own read below for our top suggestions on how to do it with a little help.
Pass with a partner
If you tried and failed to get a mortgage on your own the next best option is to buy with a partner. If the both of you have moderately good financial profiles (income, debt, assets, credit score,) you’re more likely to get approved together than on your own. The person you choose to team up with could be a romantic partner, a friend, sibling, aunt or any other person you deem suitable. Just keep in mind you’ll both be equally responsible for making sure the mortgage gets paid and you’ll need an exit strategy should one of you decide it’s time to sell.
Pass with a cosigner
If buying with a partner isn’t for you, the next option we’d suggest is to find a cosigner. Doing this gives you the same advantages of buying with a partner but you will be solely responsible for paying the bills. Unless for some reason you become unable to pay for your mortgage, in which case your cosigner will be liable.
Pass with a smaller target
If you were aiming for a larger home and failed to pass the test, consider instead setting your sights on a smaller target. Qualifying for a mortgage on a condo or townhouse may be more easily attainable. If getting into the housing market right away is what’s important to you, buying a smaller property will get you into the game sooner. And once you’ve built up some equity you’ll have some money to pour into the house you wanted all along.
There are many options available to those on the hunt for a house but who can’t seem to get past the stress test via conventional means. If ones of the above options works for you give us a call today! If you’d like to discuss something different let us know and we can get started on finding a solution that suits your needs!