Understanding that the Canadian economy is turbulent with its increasing and decreasing rates, the Office of the Superintendent of Financial Institutions (OSFI) introduced a tool in 2018 that would help to promote responsible lending in the real estate market and ensure the stability of Canada's financial system.
This tool is known as the Stress Test.
The Stress Test aims to ensure that borrowers can withstand financial surprises without becoming overly indebted as a result of them.
Let’s dive into how the Stress Test can impact you and your mortgage!
What is The Stress Test?
The Stress Test is a risk management tool used to spot flaws and probable vulnerabilities in either financial institutions or individual borrowers. This takes into account the borrower’s ability to make their monthly mortgage payments in the event of rising or decreasing interest rates.
It was implemented by the Office of the Superintendent of Financial Institutions (OSFI) in an effort to stop individuals from obtaining a mortgage without financial security, in the case of unforeseen circumstances such as the pandemic or turbulent economic swings that Canada often undergoes.
The Stress Test comes into effect if you are buying a new home, changing mortgage providers, refinance your mortgage, or take out a line of credit.
How Does The Stress Test Work?
The Stress Test works to protect you from potential mortgage defaults if interest rates climb dramatically, while also protecting you against overextending your finances. However, it is not as easy as just accepting a pass or fail! There are many different aspects that need to be considered in order to assess whether or not you are eligible for your mortgage.
To assess if you are able to commit financially to your mortgage, the Stress Test looks at:
The total mortgage amount you are asking for
Current interest rates
Amortization period
Household income
Housing costs
Current debt
With this in mind, your lender will make two separate calculations based on the criteria above:
The first calculation will be the percentage of your pre-tax income that is used to pay your mortgage, property taxes and utilities. Typically this calculation should not exceed 39% in order to be considered.
The second calculation takes into account your outstanding personal debt, which should not exceed 44% of your pre-tax income.
Once both of these calculations are finalized, your lender will be able to assess whether or not you are able to withstand both the mortgage you are interested in and the potential rising interest rates that the economy will experience in the future.
It will be easiest to qualify for a mortgage if you don’t exceed the maximum ratios.
What Happens if I Don’t Pass The Stress Test?
Not passing the Stress Test happens more often than not, and it is not something to be discouraged by! At Arise Mortgage, we work with many different lenders to help you find the mortgage that is best suited for you based on your unique financial situation.
If you have been unsuccessful in passing your Stress Test, consider the following tips to help you gain a higher chance at passing your next one:
Save money for a larger down payment.
Pay off as much other debt as possible.
Consider having a co-signer for your mortgage.
Reach out to Arise Mortgage!
Get in Touch with Our Team Today
At Arise Mortgage, we understand that each individual has a unique financial situation, and we are up for the challenge when it comes to helping you achieve your mortgage goals!
Send us a DM on Instagram or reach out to our team today by visiting our website. We are ready to help you pass your Stress Test like no other!