The Stress Test
About 5 years ago now, the Federal Government instituted a new criteria that all Canadians needed to meet in order to qualify for mortgage financing. This is called the Stress Test. Regardless of the type of mortgage you have and the discounted interest rate you are paying, you must qualify at a “benchmark” rate which is set one of two ways – depending on how much your down payment is when you buy your home.
If you have less than 20% down payment and will pay a mortgage default insurance premium to either CMHC, Genworth or Canada Guaranty, then your debt servicing ratios must qualify at the current benchmark rate – currently as of this post at 5.04%. This is not the rate you will pay your mortgage at, only the rate at which you must qualify at, to ensure that if interest rates ever rose to that level in the future, then you would still be financially able to afford your mortgage payments.
If you have more than 20% down payment and can avoid the mortgage default insurance premiums altogether, then you must qualify at the rate you will actually pay for your new mortgage plus 2% OR the benchmark rate – whichever is higher.
These changes have not really affected too many Canadians but they do serve to ensure that home buyers are purchasing homes within their means not only today, but down the road should interest rates rise. We at the Sparrow Team are happy to further explain how these changes will affect your specific home buying plans and ensure that everything is considered for your personal mortgage approval.