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Will You Pass The New Mortgage Qualifying Rate (along with the mortgage stress test)?

The Mortgage Qualifying Rate will LIKELY go up as of June 1st, 2021. How will this impact you?

Mortgage qualifying rate will likely go up by 0.46% as of June 1, 2021. To understand how this might impact your finances, we would like to quickly touch on two concepts:

Mortgage Stress Test and Qualifying Rate

Effortless Mortgage works with over 60+ banks, credit unions, B lenders, and private mortgage lenders in Ontario.

First of all, what is a mortgage stress test? And why is it important?

No, you do not need to write an exam and pass a test in order to get a mortgage. And it’s not as stressful as it sounds, well, sorta.

A mortgage Stress Test is a method used by lenders to determine your ability to make mortgage payment when you are under financial stress. This is achieved by artificially increasing your mortgage rate by adding a “buffer” to your contract rate. The lenders will then use it to calculate how much payment you will need to make if interest rate goes up, which determines how much mortgage amount you can qualify for.

Mortgage applications in Canada are subject to the Stress Test starting 2018. This applies to all mortgages, even if you have more than 20% down payment.

The purpose of the Stress Test is to ensure borrowers have some wiggle room if their mortgage payments go up due to increased interest rate. Since 5-year fixed mortgage rate is the most popular mortgage rate, many borrowers are protected from an interest rate increase during their 5-year term. However, a lot can change in 5 years. Therefore, when they renew their mortgages, if the interest rate at the time is a lot higher than 5 years ago, their monthly payment can increase drastically. This is called a “payment shock”.

By implementing a mortgage Stress Test using the “Mortgage Qualifying Rate”, the government is hoping to prevent Canadians from defaulting on mortgages due to the “payment shock” at renewal.

Ok, what is the “Mortgage Qualifying Rate”? Why is it different from your actual mortgage “Contract Rate”? 

The “Qualifying Rate” what Mortgage Lenders use to calculate how much mortgage you can qualify for. Currently it’s at 4.79%. It will be increased to 5.25% as of June 1st, 2021.

To calculate how much mortgage you can afford, Lenders use the higher of the “Qualifying Rate” and your “actual mortgage rate plus 2%”

For example, if you are applying for a 5-year fixed mortgage at 1.8%, Lenders will use the higher of 1.8% + 2%, i.e. 3.8% and 4.79% to calculate how much mortgage you can afford. Here are what the numbers look like assume a 25 year amortization and a $400,000 mortgage amount:

Contract Rate: 1.8%
Qualifying Rate: 4.79%

The Qualifying Rate is higher than the interest rate you are actually paying on your mortgage so that there is a “buffer” to ensure you are able to make your monthly payment even if interest rates go up in the future.

Your Actual Monthly Payment for a $400k mortgage: $1,655
Your Monthly Payment used to calculate mortgage qualification: $2,279

As you can see, after applying for the mortgage “Qualifying Rate”, your monthly payment will increase significantly. The lenders will then use this artificially calculated payment to determine your capacity to service all of your monthly debt payments. After applying the mortgage “Qualifying Rate”, your capacity to service debt becomes a lot less than if the lenders were to use the actual mortgage rate.

Use our affordability calculator to find out how much mortgage you can qualify for.

This change has generated some buzz in the media. See more discussions around it in this CBC article.

We’ve created real LIVE CHAT case studies from recurring or more popular questions that we get asked on a daily basis — in hopes that they provide you, our readers, with real mortgage solutions or recommendations to help you in your own mortgage journey.

If I am applying for a mortgage, how will the increase in mortgage qualifying rate impact me?

It means that with all else being the same, you will qualify for less mortgage after June 1, 2021.

How much less? It depends on your income, credit score, assets and liabilities.

Using an average mortgage size of $422k, after the new qualifying rate takes into effect, you will qualify for approximately $400k, i.e. ~5% less.

It’s always best to talk to a mortgage professional like Effortless Mortgage to determine exactly how much mortgage you can qualify for.

If you are looking to purchase, refinance, or renew your mortgage, and haven’t put in an application yet, NOW is the time to lock in a mortgage approval before the changes happen.

If I ALREADY APPLIED for a mortgage, how will this impact me?

If you already applied for a mortgage, it’s time to Seal the Deal.

Lenders will likely only “grandfather” applications that are FULLY APPROVED before June 1st under the existing qualifying rate.

That means if you already have an application with us, it’s time to send in all the documents so we can work on firming up the approval for you ASAP to take advantage of the lower qualifying rate.

Most lenders will NOT honour pre-approvals granted prior to June 1st.

Are there any exceptions to the “Stress Test” and “Qualifying Rate”? 

Yes, if a lender is not federally regulated, it will not be restricted by this change.

This includes most of the Mortgage Investment Companies and Private Lenders in Ontario.

As it gets harder and harder for Canadians to qualify for a mortgage, Private Mortgage Lenders become meaningful alternatives to help meet your home financing needs.

However, not all Private Lenders are created equal, and the rate really varies depending on the borrower’s financial strength.

We created a few Live Chat Case Studies to help you better understand how private mortgages fit into different scenarios.

To Sum It Up...
Get Your Pre-Approval Before June 1st, 2021

Mortgage Stress Test doesn’t have to be stressful when you plan ahead and understand how it can impact your mortgage qualification.

Qualifying rate is not your actual mortgage rate – by increasing the qualifying rate on June 1st 2021, your actual mortgage rate will not increase.

However, it will make it harder for you to qualify for a home purchase or refinance.

If you’re already in the market for home purchase, renewal or refinance… 

👇 Our experienced Mortgage Advisors are always here to answer any questions you have.

No obligation. Very educational.

The Effortless Mortgage Team’s goal is to work with you to find the best mortgage solution that fit your lifestyle and financial goals.

BOOK A CALL NOW

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