If the thought of passing the mortgage stress test is bringing back memories of sweating through high school exams, you’re not alone. The government originally introduced a minimum qualifying rate in 2016 to ensure that borrowers would be able to afford their homes even if interest rates rise, incomes change, or families are faced with unforeseen expenses. Now that mortgage interest rates are increasing, the qualifying rate means folks looking to apply for a new mortgage are facing a steep barrier in the amount they can afford to borrow.
What is the Qualifying Rate?
When you apply for a mortgage in Victoria, a broker or lender uses the qualifying rate when determining your debt-service ratios. Those ratios then must fit within the government criteria for lenders to offer you a mortgage loan. This is not your actual mortgage rate, but rather simulates what your payments would be if interest rates rose. It can also account for changes to your income or being faced with unforeseen expenses.
As of the time of writing, the qualifying rate for mortgages in Canada will be the higher of:
- the mortgage contract rate + 2%, or
- 5.25%
With 5-year fixed mortgage rates over 4.50%, that means to qualify you are tested at a rate of 6.50% or higher. The recent prime interest rate increases means most variable mortgages are qualifying at 5.70% or higher. With additional prime rate hikes expected this year, the stress test will quickly increase for variable rate mortgages.
Who Needs to Pass the Stress Test?
Anyone who is applying for a mortgage to buy a property, refinance their home, or switch to a different lender will need to pass the stress test at the applicable qualifying rate. It doesn’t matter whether you’re buying your first home, buying a rental property, or drawing equity out of the home you currently live in.
How Does the Stress Test Affect Affordability?
There are three factors that affect whether you pass the stress test:
- your income
- your debts
- the amount you need to borrow.
It’s difficult to increase your income on short notice. Most folks can’t simply walk into their HR department and ask for a pay raise that will keep pace with the rising mortgage qualifying rate. Therefore, your income is a fixed amount for the qualifying calculation.
Once you’ve minimized your debt as much as possible, it also remains a fixed amount for the stress test.
That leaves the amount you need to borrow as the value that can change to help you qualify. To reduce the mortgage amount, you can either increase your down payment or reduce the purchase price of the property you are considering.
If you have plenty of savings and were hoping to leave some aside after buying your home, it may be possible for you to use more of the funds to achieve your goal of home ownership. You may also be lucky enough to receive a gift of the additional funds from your immediate family. But if you’re already pouring every available dollar into your down payment, it won’t be easy to increase that amount in the short term to help you pass the stress test.
That only leaves looking at lower priced properties as the way to qualify for a mortgage. The stress test effectively caps the price point of what you can afford to buy.
What Should I Do Next?
Our realtor partners tell us they are seeing more price reductions in properties listed for sale in Victoria and the surrounding areas. And with more inventory, it’s more likely that if you continue looking you will find the right property for you at the right price.
If becoming a homeowner is part of your financial goals, there are three things you can do today.
- Refine your plan by using our Maximum Mortgage Calculator with the stress test qualifying rate to see what you could be approved for.
- Continue to pay down any debt you’re carrying and then save more for your down payment.
- If you haven’t already spoken with a mortgage planner, contact our team for your free consultation and pre-approval.
Fill out our contact form or give us a call at 250-590-6520 (toll-free 1-855-590-6520) to see how we can find the best solution for your situation.
Auxilium Mortgage Corporation is based in Victoria, BC and works with clients locally and across Canada. The Auxilium team has over 100 years of combined financial experience. We have access to dozens of lenders to help you meet your goals.
This post reflects the best available information at the time of writing/last update. In order to ensure that you have the most up-to-date information, contact us to confirm the details for your specific situation.