Many people hoping to buy a house, whether it’s their first or their fifth, have been struggling to cope with the mortgage stress test. The test was introduced by OSFI at the onset of 2018 when concerns arose about mortgage owners’ abilities to withstand ever increasing interest rates. Part of the test calculates the owner’s ability to afford either the Bank of Canada’s five-year average posted rate, or 2% higher than their actual mortgage rate — whichever is higher.
The Bank of Canada had been steadily increasing their overnight rate, which directly influences mortgage interest rates offered by lenders. It was anticipated by speculators, and projected by the bank, that rates would continue to rise. However, in October last year the Bank reached a standstill when it became evident that consumers and the economy could not in fact handle ever increasing rates.
Since then variable rate mortgages have become very attractive to home owners because it is not expected that we may not see an increase in the overnight rate for another 12-18 months. In fact, we may even see a decrease. Fixed rate mortgages are also a good option in this economic climate, especially with competitive spring/summer prices popping up at every lender.
However, there is still the stress test to consider. There are some who expect to see the test go the way of the dinosaur because it has simply done its job too well, slowing certain markets much more than intended. With the federal election coming in just a few months we can expect to see both parties dishing out housing incentives in an attempt to sway voters. Nothing in certain yet but there have been some rumours about what we can expect. One such rumour is that we may see the return of the 30 year amortization period. Presently in Canada the longest amortization period available is 25 years. An additional 5 years would help buyers not only get approval for a mortgage but also increase the amount they may be approved for.
How to beat the stress test
If you haven’t been able to beat the stress test don’t feel too bad. About 10% of buyers who could previously get approved for a mortgage can no longer get approval after the added restrictions implemented by the stress test. However, this doesn’t mean your dreams of homeownership are unreachable. Read below for a few of our tips to beating the mortgage stress test.
Buying with a partner
If your own financial profile isn’t strong enough to get the mortgage approval you were hoping for our first suggestion is to apply with a partner. If your plan was to buy with a romantic partner you probably intended to apply together. Depending on your combined financial profiles there’s the possibility that your buying power could double. However, the person you choose to buy with doesn’t have to be a romantic partner. You could team up with a friend, sibling, aunt, uncle, or parent. Anyone of your choosing. Just keep in mind that you’ll both be responsible for making sure the mortgage gets paid on time every time.
Buying with a cosigner
If buying with a partner isn’t what you want our next suggestion is to find a cosigner. Having a cosigner with a strong financial profile will help you get the mortgage approval you’re after. But keep in mind that if you can’t manage to make your payments for whatever reason, your cosigners will be on the hook to make sure the finances are taken care of.
Buying a smaller property
If homeownership is a must have in your immediate future but you haven’t been able to get approval for the kind of property you want, our suggestion is to downsize. If you were hoping for a single family home consider instead looking at townhouses or condos. Doing this will increase your ability to get approved and it’ll get you into the housing market right away. You’ll be able to start building equity and when you decide to sell you’ll have some money to put toward the house you really wanted in the beginning.
These are just three options available to those struggling to find a way to overcome the burden of the mortgage stress test. If one of these options works for you give us a call today. If you’re looking for something a little different contact us to start finding the right solution for you!