#GoodReads – Mortgage Stress Test
“What you need to know about the mortgage stress test”
“Since the mortgage stress test was introduced, it has been a hot topic for Canadian homebuyers. The stress test introduced a way for the Canadian government to protect Canadians and lenders against mortgage default and is applied to anyone who wants to begin a mortgage loan and some who are renewing.
However, although the mortgage stress test touches just about everyone who is buying a home in Canada, many people still do not understand the circumstances that lead to its creation, its purpose, and how it affects their real estate purchase.
Understanding the stress test is crucial for anyone who is looking to purchase real estate, If you are unable to pass the stress test, you will not be able to complete your home purchase – though there are ways to help yourself pass more easily. In this article, we will explain everything you need to know about the Canadian mortgage stress test…
What is the mortgage stress test?
If you are stressing about how much studying you need to do to pass your stress test – don’t be. It isn’t that kind of test. Rather, the stress test is a process that your mortgage lender will apply to model how your mortgage affordability could handle an increase in rates.
The idea is that banks want to be sure that they will be repaid when they offer a mortgage. Sure, a single default wouldn’t affect their bottom line, but a larger economic trend that causes rates to quickly increase across the board would cause defaults en masse, resulting in massive disruption. The stress test, therefore, is a means for the bank to help prevent this scenario…
Why is it needed?
The mortgage stress test is simply a way to future proof the mortgage loans that are being offered in Canada. Mortgage loans make up a huge amount of our national household debt and the housing industry is fundamental in the Canadian economy. As a result, the stress test helps to ensure that our market can remain stable and to protect our financial institutions. Events like the 2008 housing crash in the U.S. are within recent memory and are an example of what can happen when a major shock to the housing market causes effects across the wider economy.
This is particularly pertinent in the current environment of all-time low-interest rates. Though many homeowners are excited to get in on these low rates, everyone is aware that these rates are not here to stay. They will increase and it’s better to prepare for that now than to deal with the consequences later.
This doesn’t mean that the Bank of Canada actually expects rates to increase to 5.25% for example, but it must be considered as a worst-case scenario…
Who does it apply to?
The mortgage stress test applies to just about anyone who is looking to get a mortgage today. If you are renewing your mortgage, you will not need to undergo the stress test again unless you have moved your mortgage to a new lender, in which case, they will have to apply the stress test before lending to you.
Some alternative lenders that are not federally regulated in the same way as the big lenders do not need to stress test their borrowers. However, many will still choose to utilize the stress test for their own security…”
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