If you’ve been paying attention to the housing market then the phrase “stress test” will mean something to you. Maybe even something bad. The test, which was brought in by OSFI at the start of 2018, is most known for the impact it has on one’s ability to handle a higher interest rate than they agree to. The stress test measures one’s ability to deal with the Bank of Canada’s five-year average posted rate, or 2% higher than one’s actual mortgage rate — whichever one is higher.
This was warranted when the Bank of Canada was raising rates several times a year, but we haven’t seen a rate change in 7 months (the last was in October 2018) and there’s a good possibility we won’t see a rate hike in at least another 12 to 18 months. This means variable rates are a good option, especially since there is some speculation that we may even start seeing the Bank’s rates go down. Fixed rates are also a great option with lower spring rates.
There is some question about whether or not the stress test is going to stick around. Some have speculated that the although the test was intended to slow down overpriced markets it’s actually done its job too well. With the Federal election coming in the fall we’re bound to see all sorts of promises coming out of both parties. There are rumours that we may see the return of the 30 year amortization. Currently the longest amortization period you can find in Canada is 25 years. An extra 5 years would allow buyers to qualify for more than they can with a 25 year amortization period and would help lower payments.
Beating the Stress Test
Until we know what kind of changes are coming our way we need to find strategies to help buyers overcome the stress test. About 10% of buyers who could qualify for a mortgage no longer qualify with the added stress test. Here are a few ideas to get you started if you find yourself unable to pass the mortgage stress test on your own.
Go with a partner
If your financial profile on its own isn’t enough to qualify you for the home you want you could consider finding one or more partners to apply with you. Two incomes are better than one when you want to apply for a mortgage. Depending on your combined income, debt, assets and credit scores your buying power could double (or more, depending on how many people apply together.) And it doesn’t have to be a romantic partner. You could apply with a friend, sibling, aunt or uncle. The choice is yours. Just be sure it’s a person you trust and who trusts you. You’ll each be equally responsible for the mortgage payments. And make sure you have an exit plan in place in case one of you decides they want to sell.
Go with a cosigner
If you can’t, or don’t want to, go in on a home with a partner you could instead consider finding a cosigner. Having a cosigner increases your ability to qualify for the mortgage you want to apply for. Keep in mind that whoever agrees to be your cosigner will be responsible for your mortgage if you become unable to make your payments.
Go with a lower budget
If owning your own home is what you need right now but you can’t get qualified for a house you could consider lowering your budget. Instead of trying to buy a single family home you could look at townhomes or condos. This increases your chances of getting approved and allows you to own your home right away and start building equity. Once you’ve sold your smaller home you’ll have some equity to help pay for the home you really wanted in the first place.
The current housing market has a lot of options for buyers. Whether your situation is straight forward or non-conventional we have many solutions available. To get started call us today!