The B-20 Mortgage Stress Test
Genesis Builders Group on the Pros and Cons of the Stress Test
On January 1, 2018, the final version of the B-20 Mortgage Stress Test went into effect and applies to all mortgage applicants of federally regulated lenders, such as banks.
What is the Mortgage Stress Test?
The Stress Test is literally designed to test whether mortgage applicants will be able to afford mortgage payments if their finances were to become, well, stressed:
If you are seeking a new or renewal mortgage—including those that require a 20% down payment—you’ll need to prove you can afford future mortgage payments if interest rates go up by 2%.
Why Was the Stress Test Introduced?
The guidelines for the Stress Test were determined by Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), to:
Protect borrowers from overextending themselves and/or putting their homes in jeopardy if interest rates rise
Ensure responsible mortgage underwriting standards to avoid risk of unmanageable consumer debt
Decrease the risk of mortgage defaults, which significantly affect both lenders and buyers
Avoid an economically debilitating housing crash like the US experienced in 2008
How Does the Stress Test Affect You?
About one in five home buyers will find themselves disqualified by the Stress Test. The remaining 80% will find themselves qualifying for a smaller mortgage than they would have a couple of years ago:
The Stress Test reduces borrowing capacity by a minimum of ~ 18.5%. That number increases with the significance of the gap between the pre-approved and stressed interest rate.
Is There Any Upside?
Yes! While the Stress Test might keep you out of the market in the present, one of its primary goals is to protect your financial well-being in the future. By proactively building in a buffer of affordability, the Stress Test helps to ensure you can manage future mortgage payments if your financial circumstances were to change.
Being House Rich Doesn’t Need to Make You Lifestyle Poor:
At Genesis Builders Group, we know just how easy it is, and how common it is, for home buyers to want to enter into the market at the maximum mortgage amount they are approved for. After all, if the bank says you can afford it, you must be able to afford it—right? Not necessarily.
Your pre-approved amount doesn’t take into account potential rises in interest rates, changes to your financial circumstances, or the expense of furniture or other household items you will want or need to purchase for your new home.
It also doesn’t consider anything else you may want or need to spend your money on in the future, such as vacations, starting a family, or replacing or buying an additional vehicle.
Genesis Builders Group Tips for Home Buyers to Minimize Mortgage Stress:
- Choose a home that doesn’t cost, before tax, more than 30 – 32% of your annual income
- Put down a high down payment to decrease mortgage debt / monthly payments
- Settle other debts / loans before taking on a mortgage
Rising interest rates and other unexpected changes to financial circumstances can affect your ability to afford future mortgage payments and maintain ownership of your home. With that in mind, the Stress Test could be considered as a means to help mortgage seeking home buyers by assuring some financial breathing room if your circumstances were to change.
Genesis Builders Group recommends that home buyers look at purchasing a home below their maximum approval amount, and offer many options that offer the very best of home ownership at affordable price points.
Take the Mortgage Stress Test for yourself using the Government of Canada’s Mortgage Stress Test Calculator.
Learn more about Genesis Builders Group homes here, and get in touch to explore our homes in Bayside Estates. Follow us on Facebook and Instagram to stay up-to-date on the latest news, events, and promotions.