Can your mortgage pass the stress test?
A month ago, the Department of Finance announced that it had updated its regulations for insured mortgages. If you anticipate financing a property purchase with an insured mortgage, or if you will be renewing an existing insured mortgage at the end of its term, you should be aware of how these changes will affect you.
What Is an Insured Mortgage?
If you are purchasing a home with less than a 20% down payment, you are required to have mortgage insurance. This is obtained through the Canada Mortgage and Housing Corporation (CMHC), which is backed by the federal government, or through one of two private insurers, Canada Guaranty Mortgage Insurance Company or Genworth Financial Mortgage Insurance Company Canada.
The minimum down payment required for an insured mortgage is:
- 5% for a purchase price of $500,000 or less
- For a purchase price over $500,000, 5% on the first $500,000 and 10% on the remainder
Mortgage insurance may also be required for borrowers who have a larger (20%+) down payment, but have other unique circumstances relating to the nature of the property or the property’s location.
The Stress Test
A stress test is used to ensure that a borrower will be able to withstand the effects of an interest rate increase on his or her mortgage – in other words, would he or she continue to make the mortgage payments if rates were to increase?
Under the new mortgage updates, the stress test requires borrowers to be able to qualify at the Bank of Canada’s 5-year fixed posted mortgage rate. This is typically higher than the rate that a borrower negotiates for his or her mortgage.
Karen Garrett, a licensed mortgage professional with Sea to Sky Mortgages, provides this example:
“Previously, a five-year fixed mortgage at a rate of 2.44% was qualified at that rate; now, under the new rules, a 5-year fixed mortgage 2.44% must be ‘stress tested’ by qualifying at the Bank of Canada posted rate, which is currently 4.64% [as of mid-October].
For example, a buyer who qualified for a $300,000 mortgage at 2.44% will now only qualify for a mortgage of approximately $235,000 under the new rules, therefore reducing the client’s purchasing power.”
For more details on these changes, contact Karen or another trusted mortgage broker or lender. This CBC article also provides a good general outline of this new regulation, as well as some other changes to the mortgage industry.