If you’re in the process of applying for a mortgage from a bank, you’ve probably heard the term “stress test” come up. Despite the alarm bells the term likely raises, it’s fairly straightforward: You must prove that you can afford payments at a qualifying interest rate. This rate is typically higher than the rate laid out on your mortgage contract.
Realize that you are likely to be subject to one. Credit unions and other lenders don’t enforce the stress test, but if you’re seeking a mortgage from a traditional bank, you’ll probably need to pass the test. New mortgage rules went into effect in the winter of 2018, in order to ensure that homebuyers with a high-ratio or uninsured mortgage can prove their reliability. If you pay 20 percent or less as a down payment on your mortgage, you’ll be stress testing your mortgage, guaranteed.
Evaluate—and re-evaluate. If your income is consistent right now and you know that you can afford mortgage payments, it makes sense that you might not be breaking a sweat over the idea of applying. However, unforeseen circumstances can shake anyone’s financial security—especially in today’s uncertain economy. You might not have quite enough savings stashed away for a rainy day. In case of a sudden unexpected job loss or emergency expense, would you be able to afford payments?
Understand that things can, and will, change. According to the Canadian Real Estate Association, the national average price of a home was $468,350 at the beginning of 2019. In cities expanding at an astronomical rate, like Vancouver and Toronto, this is even higher. While currently, the national average is falling slightly, it’s just as possible that by 2021, the real estate market will have changed—and not in your favour. Consider whether you want to buy now, or at a later date, when you can afford to put more money down upfront.
Speak to your mortgage broker. Signing on the dotted line can be a terrifying and exhilarating experience, no matter whether the large purchase is a car, a university education or your first home. It’s not advisable to do so without the guidance of a trusted professional. Your mortgage broker will be able to point you in the right direction.
