The mortgage stress test. Heard of it? You probably have. If not, it’s a test the OSFI introduced at the start of 2018 to calculate whether borrowers could cope with either the Bank of Canada’s five-year average posted rate, or 2% higher than the actual mortgage rate — whichever one is higher. If you’ve failed the stress test you’re not alone. About 10% of applicants who would have been approved for a mortgage previous to the stress test no longer qualify.
The test was put in place because of ever increasing interest rates triggered by the Bank of Canada. The Bank bumped up its overnight rate (which directly influences mortgage interest rates) over and over until the economy reached its threshold. In October 2018 the Bank had to stop and since then we haven’t seen any movement in the overnight rate. In fact, it is expected that we will not see another increase for another 12 to 18 months. For this reason variable rate mortgage are highly desirable at present. And with competitive spring rates fixed rates are looking pretty appealing too.
In addition, we are likely to see some kind of government assistance after the fall federal election. Both parties are guaranteed to offer incentives to potential home owners in an attempt to gain voter popularity. Nothing is set in stone, however, there are rumours that the 30 year amortization is going to make a comeback. The longest amortization period in Canada is currently 25 years. But an added 5 years would do a lot to help those struggling to get approved for a mortgage, and it would enable other buyers to get approved for more than they already do.
Beat the stress test
Until then, there are several options available to buyers who have not been able to pass the stress test or who want to be able to walk into their application with greater confidence.
Buy with a partner
Many buyers plan to apply for a mortgage with their romantic partner. However, you also have the option of buying with someone else. A sibling, a friend, an aunt or a parent, basically any adult human person who has a relatively good financial profile. The choice is yours. But do consider that you’ll both be equally responsible for making sure the mortgage gets paid and that you’ll need an exit plan if one of you decides they want to sell.
Get a cosigner
If buying with a partner isn’t for you, consider instead finding a cosigner. Doing this gives you greater buying power and a better chance at passing the stress test. Bear in mind that should you become unable to make your mortgage payments your cosigner will become financially responsible.
Get something smaller
If you haven’t been able to get approved for the size of home you were hoping for, consider buying something smaller. Many potential homeowners who haven’t been able to get the starter home they wanted have gotten approval after applying to buy a condo or townhouse instead. Doing this will get you into the housing market right away, if that’s what you want, and you’ll start building equity which you can put toward the purchase of your next home.
These are just three options available to people having a hard time coping with the mortgage stress test. If one of these solutions works for you, or if you’re hoping for something a little different, contact us today!