In 2017, the federal government introduced the mortgage stress test that would apply to anyone seeking a mortgage loan or renewing their existing loan.
As of June 1, 2021, they have made changes to the stress test to reflect the current market. These changes will have an impact on anyone who is planning to buy a home or renew their mortgage going forward.
Here is what you need to know about changes to the mortgage stress test in 2021.
First of All, What is the Stress Test?
The stress test is not actually a ‘test’ per se. It’s a guideline created by the federal government that lenders must follow when determining mortgage qualifications and the amount that people are allowed to borrow.
The test was created to protect buyers during a time of historically low mortgage rates. When the mortgage rates are this low, there is only one way for them to go—up.
The stress test ensures that buyers can continue to afford their monthly mortgage payments if the rates go up, effectively preventing homeowners from defaulting on their mortgages.
Want to know more about recent changes in the Toronto real estate market? Here are some of our latest posts:
- How to Promote a Luxury Listing in the Current Market
- Buying a Home in a Shifting Market
- What Buyers in Toronto Want Right Now
How Does the Stress Test Work?
When you apply for a mortgage, your lender will offer an interest rate based on your credit score. However, under the stress test rules, that rate of interest will not be the figure used when determining your loan eligibility.
Your lender will base your mortgage eligibility on a much higher interest rate, to make sure you can continue to afford the payments if the rates go up. It’s also important to note that the stress test rules apply to both insured (under 20% down payment) and uninsured (20% or more down payment) mortgages.
How is the Stress Test Changing?
As of June 1, 2021, the minimum qualifying interest rate for mortgages will be the contracted rate plus two percentage points or 5.25%, whichever is higher.
This has gone up from the previous stress test rate of 4.79% before June 1. This means that borrowers will need to qualify for a higher rate than previous, although the actual mortgage rates that homeowners pay are still quite low.
How Will the New Stress Test Rules Affect Buyers?
Rising home prices and more stringent qualification guidelines might make it more challenging for first-time buyers. However, it’s important to remember the reasoning behind implementing the stress test in the first place. Its purpose is to help borrowers reduce household debt, remain financially stable, and continue to afford their mortgage payments when the rates start to go up again.
What Can Buyers Do?
The stress test is unavoidable and applies to uninsured borrowers, insured borrowers, and re-financers alike. However, there are a couple of specific things buyers can do to help pass the stress test and remain financially stable:
- Ensure that your Gross Debt Service ratio (GDS) does not exceed 32% of your gross monthly income. This includes your mortgage, utilities, and property taxes.
- Ensure that your Total Debt Service ratio (TDS) does not exceed 40% of your gross monthly income. This includes any personal debt you may have such as lines of credit, credit cards, car loans, etc.
Paying down debt and having a 20% down payment saved up are also great ways to ensure you are in a good position to pass the stress test as a buyer.
Interested in buying a property in Toronto? Contact us today to learn more about buying in this market.