If you’ve been recently looking at buying a house there’s no doubt the phrase “stress test” puts a bad taste in your mouth. On January 1st 2018 OSFI introduced their mortgage stress test. This test implements a few extra hoops for mortgage applicants to jump through, but the most well known is the “higher” interest rate. This part of the test measures your ability to handle the higher of an interest rate 2% higher than your actual mortgage rate OR the Bank of Canada’s five-year average posted rate.
This part of the test was warranted at the time because the Bank of Canada was on a rising interest trend. The benchmark rate was raised five times between 2017 and 2018. But since October of last year the overnight rate has flatlined and there isn’t must expectation that we’ll see it move again for another 12 to 18 months. If anything there’s a possibility that we’ll see the rate dip down again. Either way, variable rates are a very attractive option right now. And fixed rates are especially sought after in the spring housing market because lenders are eager to compete with other lenders for business.
Whether or not the stress test is going to be short lived is up for debate. There are some who feel that the test did its job a little too well, slowing down the market more than intended. With the federal election coming up this fall we’re bound to see both political parties attempting to win votes by making all kinds of enticing promises to both existing and potential home owners. The possibilities are endless but there are rumours that we may see the 30 year amortization make a come back.
Presently the longest amortization period you can get in Canada is 25 years. An added 5 years would make it easier for buyers to qualify and get access to larger mortgages.
Beating the mortgage stress test
If you haven’t been able to pass the stress test you’re not the only one. Approximately 10% of buyers who could previously qualify for a mortgage can no longer get approval with the added burden of the stress test. Here are just a few options available to those hoping to thwart the test.
Buy with a partner
There’s always strength in numbers. If you don’t qualify for a mortgage on your own your first option is to apply with a partner. Whether it’s a romantic partner, family member or friend, the option is yours. The strength of two healthy financial profiles is bound to help you pass the stress test. Be sure the person you choose is someone you trust and who trusts you back. Together you’ll both be responsible for making sure the payments are made on time. In addition, be sure to discuss an exit plan should one of you decide you want to sell.
Buy with a cosigner
If buying with a partner isn’t for you the next option to consider is finding a cosigner. The added buying power from a cosigner could be exactly what you need in order to qualify for a mortgage. Be sure to consider that whoever agrees to be your cosigner will be responsible for your mortgage if you should become unable to make your payments.
Buy with a lower budget
If you can’t get approved the house you want you could instead look at buying something smaller, like a townhouse or condo. Doing this increases your ability to get approved for a mortgage and gets you into the housing market quicker than taking the time to change your financial profile in order to buy a larger home. Plus, once you’ve built some equity you’ll be able to use it to buy the home you wanted originally.
The housing market in today’s world offers numerous options for new and existing home owners. If one of the above solutions entices you, contact us today! If you’re looking for something different give us a call to find an option better suited to your needs.