The mortgage stress test. Chances are you’ve heard of it. You may even have failed it. If you did, don’t feel too bad. Most people have been able to pass the test, but about 10% of people who would have previously been approved for a mortgage no longer can.
The stress test was brought in at the start of 2018 by OSFI when the Bank of Canada expressed its intention to steadily increase their overnight rate, a rate which directly impacts mortgage interest rates. Part of the test measures whether the borrower can afford either the Bank of Canada’s five-year average posted rate, or 2% higher than the actual mortgage rate — whichever one is higher. The Bank did exactly what they said they would and implemented several back-to-back interest hikes. But by October 2018 consumers and the economy could no longer accommodate higher interest rates and the Bank stopped its upward trend. Since then the overnight rate has remained unchanged.
There are very few speculators who believe that we’re going to see the Bank start hiking rates again in the near future. In fact, it is expected that we will not see any movement on the overnight rate for the next 12-18 months, which makes variable mortgage interest rates very desirable. Fixed rates are also a great option this season with competitive spring/summer rates being advertised by most mortgage lenders.
In addition, we may start hearing about possible housing incentives from both parties running in the federal election this fall. Nothing has been set in stone but there are rumours we may see the 30 year amortization make a comeback. The longest amortization period you can get in Canada at this time is 25 years. An added 5 years would make mortgage approval more attainable for those who are struggling to get a mortgage right now, and it would make it easier for other borrowers to get approved for larger amounts.
Coping with the stress test
Until then, take a look at some of the options we suggest for those who have not been able to pass the mortgage stress test.
If you applied for a mortgage on your own and were not approved because of the stress test, our suggestion is to apply again with a partner. Whether this is a romantic partner, a sibling, a friend or another relative, having a second applicant with a decently strong financial profile (income, debt, assets, credit score,) will improve your ability to pass the stress test and get your mortgage approved. Just keep in mind that you’ll both be equally responsible for making sure the mortgage gets paid and you’ll need a plan should one of you decide you want to sell.
If buying with a partner isn’t your jam, our next suggestion is to opt for a cosigner. Doing this improves your ability to get approved for a mortgage. However, keep in mind that whoever cosigns will be responsible for your mortgage should you be unable to make your payments.
If you were hoping for a starter home but couldn’t get approved, consider instead looking into buying a townhouse or a condo. Doing this will improve your chances of getting a mortgage and it will get you into the housing market sooner than trying to improve your finances and applying again. Once you decide to sell you’ll have some equity to pour into the purchase of your next property.
These are just a few options available to those struggling to overcome the rigors of the mortgage stress test. If one of these works for you and you’d like to get started, contact us today! If you have another idea in mind or you’d like to find out if there are other options available to you, please give us a call!