Mortgage Stress Test
Tuesday May 10th, 2022
What is the Mortgage Stress Test?
The mortgage stress test are rules that mortgage lenders use to calculate whether or not you qualify for a mortgage & the size of the mortgage.
➡️It is used to determine if you’ll still be able to pay your mortgage should interest rates rise. It is used to determine the “minimum qualifying rate”. As of June 2021 the minimum qualifying rate in Canada was 5.25%.
Who has to take a mortgage stress test in order to qualify for a mortgage?
As of 2018, all Canadian home buyers are required to undergo a mortgage stress test.
This includes buyers who:
✔️have 20%+ down payment
✔️are refinancing your home
✔️taking out a homeowner line of credit
✔️switching to a new lender.
However, if you renew with your existing lender you are not subjected to another stress test.
What does the mortgage lender look at to determine whether or not you pass the stress test?
🏡Current interest rates
🏡Mortgage amortization period
🏡Housing costs (condo fees…)
🏡Your current debt
Using this information the mortgage provider will use two calculations.
1. Gross debt service (GDS) ratio: This is the percentage of your pre-tax income you’ll be using to pay for housing costs. Housing costs include the mortgage, utilities, property taxes…
2. Total debt service (TDS) ratio: ALL of your outstanding personal debt including, but not limited to your mortgage, car loans, credit card, lines of credit, etc.
👎🏼A high GDS & TDS ratio may mean that you have to reconsider how much you can afford.
👍🏼A low GDS & TDS ratio means you could potentially afford more expensive property.
How can you improve your stress test results?
The goal is to lower your DGD & TDS ratio. You can do this by:
💰Increasing the size of your down payment
💰pay off debt
💰find someone to co-sign your mortgage
A mortgage specialist can help you find the option that suits your needs. Once you know what size of mortgage you can afford you can take the next steps in your journey to becoming a homeowner.
This information should not be relied on as legal advice, financial advice, or a definitive statement of the law in any jurisdiction. For such advice, please consult your own legal counsel, financial representative, and/or insurance representative.
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