Let’s talk about the stress test…again.

With rising interest rates and shifting market, the much maligned mortgage stress test is back in the front of our minds. But before you panic, let’s break down how it’s going to affect your qualification this summer.

It seems like since the mortgage stress test (aka mortgage qualifying rate) was introduced in 2016, it’s kind of been all we’ve been talking about, doesn’t it? Brought in by the Office of the Superintendent of Financial Institutions (OSFI) to ensure that homeowners, who were then (and still are) carrying high household debt would still be able to afford their mortgage payments in the event of an increasing rate environment. Today, as rates increase just as we knew they would, we are seeing countless new homeowners who purchased at famously low rates counting their lucky stars that they were qualified against a higher rate proving that when renewal time comes and their contract rate spikes, they won’t be priced out of their own homes.

But how will the infamous test affect those that are thinking about taking advantage of this newly balanced market and purchasing this summer? Well, with fixed rates cresting 5%, the current stress test (the greater of 5.25% or contract rate +2%) is forcing borrowers to qualify at rates 7% and above. In other words, if you are applying for a mortgage at a rate of 5.20%, you will need to prove you could still afford your payments at a rate of 7.20%. This difference can have a significant impact on the amount you will qualify for and, as a result, how much home you can afford. But before you let the stress test stress you out, let’s look at some of the great options we have at our disposal:

• Choose a credit union.

  • Since the stress test only applies to federally regulated lenders, provincially regulated credit unions are exempt. Sure, rates could be slightly higher if you choose those route but avoiding the qualifying rate could increase your borrowing power by up to 33%!

• Go variable.

  • Today, variable rates remain low enough that the qualifying rate remains 5.25%. That said, with potential further increases to the Bank of Canada overnight rate expected in a matter of weeks, it’s best to hop on this option sooner than later.

• Shorten your term.

  • Most borrowers opt to go with a 5 year term as a force of habit, but did you know that 2 and 3 year terms are also available? In many cases, fixed rates remain below 5% for these quick contracts and, as an added bonus, knowing your renewal is just around the corner might give you some peace of mind that you’ll be able to review and switch up your mortgage to suit your needs sooner than later!

Of course, the best way to understand exactly how the stress test will affect you is to connect with a professional. Every circumstance is so different, and we are here to ensure that you are able to make the most educated and prudent decisions regarding your finances possible. Reach out to the team today and we would be happy to go more in depth with how we can make the stress test altogether less stressful for you!