289-755-0146 amy@amycoburn.com
Here is a fairly simple way to explain the stress test you may have been hearing about in the mortgage industry.  Although it has nothing to do with your blood pressure… it may make it rise a little.  We will try our best not to let that happen.

The stress test is used to see if you can afford to meet your monthly financial obligations given your current income.  Housing costs (mortgage + property taxes + heating + condo fees) cannot exceed up to 39% of your monthly income and total debt (housing costs + all other monthly debt obligations; ie. credit cards, car loans, lines of credit, etc.) cannot exceed up to 44% of your monthly income.  This is what we call qualifying for a mortgage or passing the stress test.

When Purchasing a home with less than 20% downpayment:
Your monthly mortgage payment is calculated using the BOC-Bank of Canada benchmark interest rate (currently 4.99%) with payments stretched over 25 years (amortization).  This is the payment used to see if you can afford the payments at your current income.  It is not what you will actually pay.

If you are putting less than 20% down on your purchase, you must get mortgage default insurance through CMHC, Genworth or Canada Guaranty.  This insurance is to cover the mortgage lender in case you default on your payments.  You will have to pay a premium for the insurance and be limited to maximum 25-year amortization, however you will also be offered the best mortgage rates.

Effective January 1st, 2018*
Refinancing or Purchasing with 20% or more downpayment:
For the stress test, your monthly mortgage payment is calculated using either the actual interest rate plus 2.0% or the BOC benchmark, whichever is higher, and payments can be spread over 25 to 30 years. (This is dependant on what the maximum amortization the lender offers.  Most offer up to 30 years.)

*Prior to January you can still qualify at the actual contract rate on all refinances and purchases with 20% or more downpayment, provided the term of the mortgage is at least 5 years.  We are still waiting to hear if there will be a cut off date that the deals must close by if they are in a contract prior to January.

This change could greatly impact how much of a mortgage you will qualify for come the new year.
For Example:
Prior to January change:

Annual Income: $110,000
Mortgage Rate: 3.49%
Qualifying Rate: 3.49%
Downpayment: 20%
Mortgage Amount: $560,000
Purchase Price: $700,000

After January change:

Annual Income: $110,000
Mortgage Rate: 3.49%
Qualifying Rate: 5.49% (3.49% + 2.00%)
Downpayment: 20%
Mortgage Amount: $472,000
Purchase Price: $590,000

Difference of $88,000 lower mortgage amount : $110,000 lower purchase price!!
If you are thinking of buying or refinancing your current mortgage, the time to act is now.  Give us a call.

Amortization: The number of years it will take to pay the mortgage balance in full.
BOC: Bank of Canada
Benchmark: The Bank of Canada sets the benchmark rate by determining the average 5 year posted mortgage rate by the big banks.
Contract Rate:  This is the interest rate that you will pay on the money borrowed for the term selected.
The example is based on 25 year amortization and 1% property taxes.