Everything you need to know about recent changes to the “Stress Test.”
The pandemic has resulted in many changes for many people, on that I think we can all agree. One thing that we are seeing more and more of, throughout these challenging times, are boutique and micro-weddings. Couples who have been waiting patiently in some cases for almost two years are now choosing to go ahead with much smaller weddings than those they had originally planned. There’s still plenty of opportunity to make them special and meaningful, and – where I sell real estate (Kleinburg, Woodbridge, Thornhill and Vaughan) plenty of beautiful spaces to hold them too! But here’s another big advantage you may not have given a lot of thought to and that’s the potential for increased and easier access to a mortgage! Here’s everything you need to know about recent changes to the “stress test” and no, we’re not talking about the stress of walking down the aisle on your big day!
What is a Mortgage Stress Test?
A stress test is something that is asked of every buyer when they are starting the planning process towards buying a home. In this fast-paced real estate market, many buyers are seeking pre-approvals for mortgages and as of June 1, 2021 banks, credit or mortgage lending institutions, are applying a new standard of measurement to how those approvals are taking place and that’s through a mortgage stress test. It’s when any of the above named institutions applies a specific formula to determine you capacity to pay your mortgage each month. The rules governing stress tests are overseen by the Office of the Superintendent of Financial Institutions Canada (OSFI) and occasionally are changed or updated to match both what is going on in the current economy and to ensure concerns that “some home buyers may be stretching their mortgage budgets to the max” don’t happen. In other words, the bank is doing you a favour – helping to protect your ability to pay your mortgage, even if interest rates were to climb or you experienced a temporary setback such as illness or loss of employment.
What does this have to do with getting married you ask?
- The answer is mainly this:
- Previously, a stress test was typically only applied to high ratio mortgages. These would be mortgages that don’t meet the specific threshold for a downpayment. Currently this threshold comes in to play when a buyer has a downpayment of less than 20% of the purchase price of the home.
- Now however, a stress test is applied to ALL Canadian homebuyers seeking a mortgage. A mortgage stress test requires banks to check that a borrower could still make their payments, even at a rate that’s higher than what they will actually be paying. *(1)
If you’re getting married AND keeping it small, you just might pass the test!
Here’s how it works:
- When you apply for a mortgage, the bank needs to know if you’ll be able to pay back your mortgage, even if rates rise during your term.
- How the bank does this is shown at the end of this blog and is according to an article recently released by Scotiabank.
- In addition to applying this test, high ratio mortgages will also still be subject to purchasers insurance.
- The good news (and about that wedding) is that if you’re keeping the crowds smaller and planning a more intimate, family-oriented wedding – you can pocket some of that “Busta Box” cash to put towards your downpayment – maximizing your investment and minimizing your risk!
- That’s great news for young couples who are looking to have their patience and perseverance around wedding delays pay off in an appreciable way!
Don’t be frustrated by long waits for a wedding. Capitalize on these challenging times and do something a little different instead. Smaller venues, boutique weddings, simple flowers and fewer guests are actually becoming more and more popular. With the unexpected benefit of a significantly less costly wedding to pay for, you may just find yourself in a better position to afford more home for your money! In this current hot, hot, hot real estate market – having pre-approvals in place and a little more money to meet the stress test provisions – might just make all the difference between wishing for a home and actually buying one. I help you “buy with confidence,” so go ahead and ask me more about stress tests, mortgages and financing. Just don’t ask me anything about the occasional stress that arises in any marriage – even the best of them!
