It’s like a rainy day mortgage plan.
A stress test is essentially a way of determining how much you can afford in the event of unforeseen circumstances. It’s sort of like a rainy day mortgage plan -and that’s a good thing. Mind you, it does have a substantial impact on how much of a mortgage you can qualify for. What does this mean?
The minimum qualifying rate must be equal to the Bank of Canada’s five-year benchmark rate (currently 3.34%)* or their contractual lender rate, plus two percentage points.
Confused yet? Let me break it down with an example:
- Cindy and Jack decide to buy a home.
- They have qualified for a lender rate of 3.5% (mortgage) with a 25 year amortization period.
- They are purchasing a $500,000 property and placing a $100,000 down payment on the property.
- Minus their down payment, they require a mortgage for $400,000. Their mortgage payments (excluding additional expenses) would be $1,997/month. Great!
- Now before you get too excited, Cindy and Jack still need to pass the stress test.
- Their mortgage rate of 3.5% + 2% = 5.5%.
- This brings their ‘stress test’ mortgage amount to $2,442/month.
- Cindy and Jack need to pass the stress test at a higher percentage (5.5%), but they will only be paying the lender rate (3.5%).
In essence, the lender must ensure that Jack and Cindy can pass the stress test and ‘afford’ the higher percentage. In the event interest rates rise and Jack and Cindy’s financial situation remains the same, they should be able to afford that extra amount on their mortgage.
*Rate as of July 6, 2018.