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Homeowners Guide to Overcoming Canada’s Mortgage Stress Test

Since its introduction in 2018, homeowners across the nation have dealt with financial difficulties and challenges when facing Canada’s infamous mortgage stress test. So to help take the stress off any mortgage concerns you may have, the Leap Financial team has broken down exactly what you need to know about the mortgage stress test.

What Exactly is a Mortgage Stress Test?

The mortgage stress test concerns a fixed set of rules that banks must abide by, and allows them to determine the amount you can borrow. Banks must follow these rules whenever you apply for: 

  • Any sort of new mortgage loan, or
  • A home equity loan or home equity line of credit (HELOC)

 The stress test acts as a mortgage qualifier tool for Canadian banks, which typically relies on a variety of factors. But what is it about the stress test that causes so much trouble for homeowners?

Because of the mortgage stress test, Canadian borrowers are forced to qualify at interest rates that are typically higher than the actual interest rate they’ll be paying on their loan, assuming they get approved.

How Does the Stress Test Affect Homeowners?

When you apply for a mortgage loan, the stress test allows the bank to examine your financial information. This is used to help banks determine whether you even qualify for the loan you’re applying for.

Typically, this information is a snapshot of your current financial situation and includes your:

  • Total debt
  • Credit score
  • Current income against your housing expense

 

To help determine your loan eligibility, banks are also required to use a qualifying interest rate. However, depending on the type of homeowner loan you’re hoping to receive, the rate may vary significantly.

Bank Requirements for New Homeowners

For homeowners that are new to the market and in search of their first mortgage, if you have mortgage loan insurance, you’ll have to make sure you qualify at whichever interest rate is higher:

  • Your current bank’s rate, or
  • The Bank of Canada’s conventional five-year mortgage rate

 

Unfortunately, if you don’t have mortgage loan insurance, you’ll be forced to qualify at the higher of your bank’s current rate with an additional +2%, or the Bank of Canada’s rate.

Bank Requirements for Existing Homeowners 

Existing homeowners will be obliged to meet the same qualifying interest rates as new homeowners. This is the case when applying for a:

  • HELOC
  • Home equity loan
  • Second mortgage loan

 

However, HELOC applicants must qualify at the higher of their bank’s rate +2%, or the Bank of Canada’s rate.

How to Overcome the Mortgage Stress Test

While the strict stress test criteria are often difficult for borrowers to meet, there is a process that allows homeowners to apply for a loan and forego the mortgage stress test that traditional financial lenders (ex. the banks) require.

If you’re a homeowner in search of a loan, specialized financial lenders, such as Leap Financial, allow you to apply for mortgages or home equity loans without the requirement of passing a stress test! At Leap Financial, your loan approval is dependent on the home equity in your home (the value of your home), not on your existing credit score or income.

Whether you’re in dire need of capital or are simply just a homeowner looking for equity to finance a project, Leap Financial is here for you. Take your first steps towards your financial dreams today, and fill out our cost-free zero-obligation form to find out how much you qualify for.