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The Mortgage Stress Test

Jul 08, 2021

Canada has a competitive mortgage market, and buying a house in Canada is a long process; things have changed due to the mortgage stress test. What is a mortgage stress test? If you’re going to be buying a house in Ontario, familiarizing yourself with the mortgage stress test will help you break down the costs of your mortgage payments.


What is a mortgage stress test?

A mortgage stress test is used to determine how much you can afford for your mortgage. The test considers how much you put down for your mortgage against the current interest rates on the mortgage market. It is also used to predict if you can still make your mortgage payments if you lose your job.


How does a mortgage stress test work?

When applying for a mortgage, the bank checks to ensure that you’ll be able to make your mortgage payments. Banks use the mortgage stress test to calculate your mortgage using a higher interest rate than being offered to you to determine a worst-case scenario. You can think of a mortgage stress test as a predictor of future payments for you as the borrower. The bank also uses it as a simulated predictor to test whether or not you would be able to make your mortgage payments based on that high-interest rate.


A Mortgage Stress Test Example

An example is the best way to help you understand how a mortgage stress test works. Let’s say that you and your partner want to buy a house. Your partner’s total annual income is $150,000. The best mortgage rate in Ontario is 2.09%, and your bank gives you a rate of 2.49%.

Based on our mortgage qualification calculator, factor your spouse’s $150,000 income and a 10% down payment on a 5-year fixed mortgage rate of 2.49% amortized over 25 years. Based on those figures, you and your spouse could get a mortgage for a house priced at $1,499,999 with a 2.44% qualifying rate.


How to Financially Prepare for the Mortgage Stress Test

 “A winning effort begins with preparation” – Joe Gibbs - professional football coach. Preparation is key to getting the best rate when it comes to applying for a mortgage. One of the best things you can do to prepare for applying for a mortgage is to pay all of your debts until it reaches a zero balance. Now is the time to focus on paying off those high-interest credit cards, any outstanding debts you owe to collection agencies, and even those store credit cards that you use for online purchases. Trim those down below the 30% credit utilization rule.

If you would like to know more information on using a mortgage qualification calculator in Ontario, we would love to help you. Feel free to contact the Shelly Knows Mortgages Team for a free consultation, and we will walk you through the steps and provide you with the tools you need. 

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