When it comes to mortgages, a few percentage points can make a big difference.
We invited the mortgage experts from mortgagecalculator.ca to talk a little bit about the Bank of Canada's recent lowering of the mortgage stress test percentage rate. Enjoy this great read full of useful information and tips for new buyers and homeowners alike. - REW
Finally, we have a long overdue break for people that are in a position to renew their already existing mortgage or people that wish to secure their first mortgage loan. The Bank of Canada has dropped their mortgage qualifying rate from 5.34% down to 5.19%.
For homeowners and home buyers, this is fantastic news. Though it may seem like a difference of only a few tenths of a percent, the decrease provides prospective buyers a well-deserved leg up financially. Before outlining the immediate benefits to the lower percentage rate, let’s quickly explain how the Bank of Canada’s stress test works.
What is the Mortgage Stress Test?
The stress test that is imposed on a mortgage loan borrower or a mortgage loan renewal/refinancing homeowner is a means of making sure that the borrower can comfortably afford to take on the mortgage loan over an extended period of time. The Bank of Canada doesn’t just want borrowers to prove they qualify for a mortgage loan - they also require new borrowers to pay additional money over a 5-year ‘stress test’ time span. For borrowers that do not require mortgage loan insurance, the lender must charge the borrower either the conventional 5-year mortgage rate set by the Bank of Canada, or, the interest rate that is negotiated by the borrower and the lender with an additional 2% interest added (whichever interest rate is higher).
If the borrower does require mortgage loan insurance, the lender will impose either the conventional 5-year mortgage rate set by the Bank of Canada or the interest rate negotiated with the lender, whichever is higher.
Mortgage loan insurance is sometimes a requirement by a lender as a means of reassurance that the mortgage loan will be paid back in full, in case the borrower defaults on the loan for any reason.
Major Bank Mortgages vs Private Lenders
Something to consider: Only major banking institutions are regulated by the federal government and must impose the laws set by the Bank of Canada. Private mortgage lenders, mortgage brokers and other mortgage related lenders aren’t subject to the same regulations and have far more flexibility when it comes to approving mortgage loans without the ‘stress test’ involved.
If you’re trying to figure out how much mortgage you can qualify for or afford, getting answers to your financial questions is easy when using any of the mortgage calculator tools found at sites like https://mortgagecalculator.ca. Mortgage calculators can also be found on your bank’s website or other real estate websites (for instance, right here on any REW.ca listing page). They’re easy to use, free and can be customized multiple times to narrow down financial information for you.
One of the biggest perks to the decrease in the Bank of Canada’s stress test rate (besides saving money) is that home buyers and homeowners looking to refinance or renew will have the freedom to seek a higher dollar amount on their mortgage loan. That perfect home that caught your eye, but was out of reach financially may be within reach and actually affordable.
An increase of purchasing power for prospective buyers and homeowners offers a dual benefit: Qualification for a higher mortgage loan with a stronger position for negotiating an even better interest rate with a lender. Happy hunting!