Canada Introduces Stress Test to Mortgage Application Process

The federal government of Canada recently changed some of the rules and regulations concerning mortgage rates and home buyers.  On October 17, the stress test was put into action.  The new set of regulations requires all mortgage applicants that have provided 20% or less as their down payment will be subject to a stress test.  This test will ask the borrower or applicant to prove that if their interest rate were to go up 4.64% that they can still afford it.  Although it does sound a bit unfair, the purpose of this new procedure will hopefully stabilize the housing market, more specifically in Vancouver and Toronto where prices have been consistently sky rocketing.

The stress test is not exactly new to the buying process.  Those who chose a variable rate mortgage or a fixed rate for less than 5 years have been put through the test, but this change affects first time home buyers the most.  Although they won’t be paying more for their home necessarily, they will definitely be getting less for their money.

For example, if a household has an annual income of 80k and they wish to put 5% down on a home, they would likely be approved for a home hovering the 500k mark.  Now with the introduction of the stress test, that same 5% down payment would only be approved for a home closer to 400k.  With that being said, even though the ‘purchasing power’ is lower, this will help home buyers stay within their means and hopefully better the household debt as it has been increasingly high in recent years.

The week before the new rules were implemented, several mortgage brokers had reported a 30%-40% increase in business, as many wanted to avoid the extra hurdle of buying a home.

Do you think the expansion of the stress test will ultimately decrease household debt? Tell us what you think about the new mortgage rules in the comments below!

 

This post is sponsored by Choras.  To learn more about them and their financial services, check out their website here !

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