Do You Need a Mortgage Stress Test?
Introduced in Canada in January 2018, the mortgage stress test is something you need to pay attention to if you’re hoping the bank will approve your mortgage.
Not only does the stress test determine how much money you can borrow, federally regulated financial institutions must use it to determine if you qualify for a mortgage or home equity loan in the first place.
The Why and How of Mortgage Stress Tests
The main goal of the mortgage stress test is to better prepare borrowers for rising mortgage interest rates. To do that, the test forces mortgage-seekers to qualify for financing at a higher rate of interest than the rate they’d actually be paying should their loan be approved.
So how does it work?
When you apply for a mortgage loan from a bank, several measurements are used to establish whether you’re likely to make your payments on time.
In addition to considering your credit score, the bank will:
- weigh your income against your housing-related costs, and
- evaluate your total debt (including things like education loans and personal lines of credit)
They’ll then incorporate that information into their mortgage stress test to determine if you can afford to borrow at the qualifying interest rate – a rate that varies with the nature of your loan (more to follow).
Who Needs a Mortgage Stress Test?
You’ll need a mortgage stress test if you’re applying to a bank, and:
- you’re a first-time home buyer,
- you’re looking to refinance your mortgage, or
- you want to qualify for a second mortgage, home equity loan, or home equity line of credit (HELOC)
If you’re renewing your mortgage – but you decide to switch lenders – you’ll also need to pass a stress test.
New homeowners with mortgage loan insurance must qualify for a first mortgage using whichever interest rate is higher: their bank’s rate, or the Bank of Canada’s conventional five-year mortgage rate. Home buyers without mortgage loan insurance must qualify using the higher of their bank’s interest rate plus 2%, or the Bank of Canada’s benchmark rate.
Refinancing Your Mortgage
If you’re working with a bank to pay out and replace your mortgage loan through mortgage refinancing, you’ll also be subject to a stress test. Renewing your mortgage before its current term ends essentially means having to prove you can afford payments at a higher interest rate than the one laid out in your new mortgage contract.
Second Mortgages, HELOCS and Home Equity Loans
Despite being based on the equity you hold in your home, if you’re hoping the bank will approve your home equity line of credit – or a second mortgage in the form of a home equity loan – you’ll still need to pass the stress test. HELOC applicants, for example, must qualify at either their bank’s interest rate plus 2%, or the Bank of Canada’s benchmark rate – whichever is higher.
When weighing your financial options, it’s worth noting that private mortgage lenders like Alpine Credits aren’t required to perform mortgage stress tests. And that’s great news for anyone who’s retired, self-employed, or whose credit may have been damaged.
If you’re in the market for a second mortgage loan and you’re looking to capitalize on your property’s equity, Alpine Credits’ home equity loans are one of the fastest and easiest ways to get money from your home – no matter your income, age, or credit history.
Unlike the banks’ stringent lending criteria, our licensed mortgage brokers focus on the value you hold in home equity. And we can approve your “stress-free” home equity mortgage application in as little as 24 hours.
At Alpine Credits, Homeowners Get Approved.