From the day I started here at Personal Mortgage Group 8 years ago, I have been talking about the “stress test”. It is an integral part of the mortgage formula and something that decides the fate of so many buyers looking to get into the real estate market.
What is the stress test? It is an interest rate that we use in your mortgage application to make sure that you are going to be able to afford your mortgage 5 years from now. It’s like the payload of a truck: at some point, you can load TOO much gravel into the back and the whole thing comes apart.
In fact – we should probably just start calling it the mortgage payload. It’s way cooler sounding.
For years, the stress test was based on the average 5-year posted rate from the big 6 banks. The banks price their posted rate based on the bond market, so as the bond market rises and falls the bank’s posted rate follows. It worked okay, but in general, the banks were very slow to move their rates. The posted rate is always meant to sit somewhere around 2.00% above the typical 5-year fixed rate, but there have been periods where the posted rate was closer to 3.00% above, unnecessarily restricting borrowers from accessing mortgage money.
As of mid-April 2020, we will start using the new stress test which will be set by the Bank of Canada on a regular basis and should facilitate higher borrowing capacity for mortgage seekers who are struggling to get what they need.
What does that mean for you?
For buyers – that will translate into a slight increase in buying power. It’s not going to push people way over the top, but it could increase your mortgage qualifying by 3% or more. Couple that with the fact that interest rates are going down and you should have some more confidence to shop in this market.
For sellers – don’t tell the buyers this, but you will probably end up selling for quite a bit more as a result of their newfound confidence.
For clients looking at a potential refinance for renovations or debt consolidation – this new stress test only applies to insured mortgages so it’s the same old, same old for you. Sorry!
For clients up for renewal – you don’t have to apply to renew, so it doesn’t affect you at all.
All in all, it’s not an especially big change from what we had before but it is a step in the right direction and should help a few clients.
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