4 Loopholes to Canada’s Mortgage Stress Test

Has the Mortgage Stress Test got you down?

Since the inception of mortgage rule changes introduced by the Federal Liberals in 2017, there’s been a reversal in the consumer market place for mortgage shoppers. The once stable, income earner with their a home of their own and a strong equity position now find themselves disadvantaged when compared with the preferred mortgage rates and Stress Test treatment by afforded to borrowers in need of a high ratio (insured) mortgage, typically first-time home buyers with less than a 20 percent down payment. Unlike conventional mortgage shoppers, borrowers of a high ratio, insured mortgage are typically Stress Tested at the Bank of Canada Stress Test rate of 5.19 percent (previously 5.34 percent) with sometimes higher debt servicing limits.

A Conventional mortgage is typically a non default insured mortgage where the borrower has greater than 2 percent equity in the property. Therefore, borrowers with conventional mortgage are not required to pay mortgage default insurance.

Keep in mind, just because it all looks rosey on the surface for high ratio borrowers, these borrowers are required to pay 1000’s in default insurance premiums. Which, in most cases are added into the mortgage, driving higher interest payments over the term of the mortgage.

But if you’re shopping for a Conventional Mortgage, consider these 4 loop holes which may help be a determining factor to whether or not you get approved for a mortgage.

1. Use the spread between Variable and Fixed Rate Mortgages to your benefit 

One “workaround” has to do with correctly choosing between a Variable or Fixed rate mortgage. Typically — but not always, the spread between a variable rate mortgage to a fixed rate mortgages is historically lower.

Last year, 2018, mortgage lenders were offering conventional (uninsured) variable rate mortgages for 3.25 percent (Prime rate 3.95 minus 0.70) , compared to 3.89 percent for a five-year fixed rate mortgage. The Stress test rule for conventional, uninsured mortgages is the greater of either the benchmark rate (at the time was 5.34 percent) or the contracted interest rate plus 2%. (As of August, 2019 the Stress Test rate was reduced to 5.1 percent). In this scenario, those who chose the variable rate option were stress tested at the 5.34% benchmark rate verses 5.89%, a 55-bps (basis points) stress test in favour of the consumer who chose the lower discounted variable rate verses the 5-year fixed.

2. Consider Credit Unions

The majority of credit unions in Canada are provincially regulated. Meaning, unlike federally regulated banks, the stress test doesn’t apply to credit union customers. An exception is Quebec. Instead the mortgage rate you contract for is used to test your ability to repay your mortgage and debts but not at the higher Stress Test rate. 

3. Consider a more flexible lender

Some mortgage lenders allow more flexibility with the debt servicing ratios than others. If you have a steady job, good income, good equity in the property and solid net worth, the lender you choose may consider an exception to hard-fast debt servicing limits.

4. The world of Alternate lenders

Non-prime or alternate lenders including federally regulated trusts and banks are also options.

Compared with Prime lenders like major banks and monoline lenders, they have more lenient total debt servicing ratios. In short, although, the stress test still applies, total debt-service limits can be much higher.

Need help navigating through the complexity of mortgage lending? We have access to over 50 lenders with solutions to assist you with your mortgage planning goals. 

Steven Porter is a Licensed mortgage agent with Mortgage Architects, mortgage broker. For advice and service contact Steven Porter, Accredited Buyer Representative, Seniors Real Estate Specialist, Certified Luxury Home Mortgage Advisor and Certified Reverse Mortgage Specialist at 905-875-2582, steven@1800Mortgages.ca. www.1800Mortgages.ca