How Canada’s New Mortgage Stress Test Affects You
Since January 1, 2018, all Canadians renewing or refinancing a mortgage are required to pass a stress test to prove that they can handle a 2% interest rate increase. 2% might not sound like much to some, but it’s a lot, particularly when dealing with homes that cost hundreds of thousands of dollars.
What The Stress Test Looks Like
The Office of the Superintendent of Financial Institutions (OFSI) believes the mortgage stress test will cool and stabilize the Canadian real estate market. However, critics say the new stress test will hurt a lot of buyers and refinancers and may slow down the economy as fewer homes will be purchased, renovated, and furnished. As much as the OSFI says the stress test is there to protect us, it doesn’t really work in the buyer’s favour.
What This Mean for Homebuyers
A 2% stress test will hit one home buying segment the hardest: first-timers buying uninsured mortgages. Uninsured mortgages make up approximately 15% of all Canadian homebuyers. Analysts estimate that stress tests can lower a new family’s purchasing power by up to 20%. New homebuyers may need to ask their parents or relatives to act as co-signers to deal with the new stricter lending policies.
What This Means For People With Existing Mortgages
If you’re thinking of renewing or refinancing a mortgage, the stress test may make it difficult to negotiate with a new bank. Even if you continue with your existing bank, you likely will not be able to refinance for as much as you were hoping for.
What Are Loan To Value Ratios?
A loan to value (LTV) ratio is a number that measures a mortgage’s value as a percentage of a property’s total value. Traditional lenders, such as banks, regularly use LTV. The higher the LTV ratio, the riskier a loan is. For many debt products such as mortgages, lines of credit, or home equity loans, an LTV ratio had to be lower than 80%. That’s another way of saying that you could only borrow if you had built up at least 20% in home equity.
How Did The Old Lending Rules Work For Canadians
Under old LTV ratio rules, you did not have to pass a stress test when renewing a mortgage. If you were refinancing, you could tap up to 80% of your home’s equity.
How Do The New Lending Rules Affect Canadians
If you’re looking to refinance your mortgage, you’ll have to qualify under the new stress test rates, not the initial mortgage rate you were given. This means if you had a mortgage at 3%, you’ll be stress tested at 5%. This means you have less borrowing power and may have to build up more equity. Canada’s stress test rules also apply to home equity lines of credit. Banks will add two points to their benchmark lending rate when you apply for these products.
Credit Unions And Private Lenders Are Unaffected
January’s new rules and stress tests do not apply to credit unions and private lenders (they are regulated at the provincial level rather than federal level). By using a credit union, homebuyers can avoid stress tests and receive a larger mortgage.
Lender Experts Will Help You Secure The Mortgage You Deserve
Lending Experts is a private lender that serves Vancouver, Surrey, Burnaby, and Maple Ridge. We specialize in mortgages, debt consolidation, and debt counselling. As a private lender, we are unaffected by stress test regulations and will help you find you the best mortgage rates out there. Contact us today to buy the home of your dreams.