On January 1, 2018 mortgage rules have changed requiring applicants to pass a mortgage stress test.
What's a Mortgage Stress Test?
The mortgage stress test requires home buyers and real estate investors who are putting 20% downpayment or greater to qualify at the contract rate + 2% or the benchmark rate whichever one is greater. What does that exactly mean! Here is an example: home buyer putting 20% down to buy a home and looking for a 5 year fixed mortgage at 3.34%. Prior to January 1, 2018, the home buyers would have had to qualify based on borrowing at 3.34%. Nowadays, the government is mandating the home buyer qualifies at the higher of 3.34%+2% (5.34%) or benchmark rate (5.14%). Although the cost of borrowing does not change, the mortgage is borrowed at 3.34%, the qualification rate of 5.34% (which is the higher of the 2 options). The mortgage stress test effectively lowers the purchase power of the homebuyer by approximately 20%. The bar to qualify for a mortgage just got higher!
4 Ways to Beat the Mortgage Stress Test
1 . Buy a home with an income suite Banks and lenders can use 50% up to 100% of rental income off a secondary unit. For example, if you buy a semi-detached with basement income suite generating $1400 a month of rental income, that's up to $16,800 may be added as income when qualifying for a mortgage. Check with your mortgage broker or banker to see what percentage off the rental income can be used to qualify.
2. Credit Unions The mortgage stress test is a requirement set by OSFI which regulates federal lending institutions, credit unions are regulated provincially and some have not implemented the mortgage stress test. Check with your local credit union or ask your mortgage broker for credit union options.
Beat the Mortgage Stress Test Bonus
3. Adjust search criteria. In real estate, there are 3 factors to consider:
Location: choose a neighbourhood adjacent to the one you're looking for
Features: 3 bedrooms instead of 4, unfinished basement for now which can be finished later
Price: Lower priced home
4. Gifted Downpayment: a gift from mom and dad to increase the downpayment and compensate for the new mortgage stress test requirement. This is not an option for everyone but it is something that has become more prevalent in the Toronto real estate market.
There you have it, 2 ways + 2 bonus ways to beat the mortgage stress test requirement.