How to Cope with the Mortgage Stress Test

“How am I going to qualify for the home I want?” That’s the question on the minds of prospective home buyers as a complex real estate market, and stringent mortgage criteria threatens their ownership dreams. Seeking sound financial advice can help.

The stress test, introduced early this year, requires that home buyers with an uninsured mortgage qualify for a rate that is the greater of the Bank of Canada’s benchmark rate; or the rate negotiated by the buyer with their lender, plus two percent.

There are several common concerns among Canadians, according to a July report from The Mortgage Professionals of Canada. But, tax and financial advisors can mitigate these fears by helping with debt management strategies and wealth accumulation tips to boost their clients’ ability to qualify for the mortgages they want, without sacrificing their future security.

What’s fueling the fears of prospective home buyers? According to the survey:

• 100,000 Canadians say they’ve been prevented from buying a home due to the stress test.
• 18 percent of prospective buyers believe they could afford their desired home, but for the stress test.
• 32 percent expect that the stress test will have significant negative impacts on their ability to buy a home.
• 54 percent who aren’t currently home owners but expect to buy in the next 5 years believe they’ll be impacted.

Advisors can help in a few important ways:

To address the first three fears, reassure clients that the implications of the stress test aren’t all bad. As we reported in July, it protects consumers from biting off more than they can chew when investing in real estate. Invite your clients or prospective clients to begin a consultation with you by reviewing the requirements of the stress test against their housing goals.

To address the fourth – the issue of affordability may be as simple as waiting a bit. Lower housing prices could be just around the corner as the stress test will also help suppress the hot housing market in cities like Vancouver and Toronto in particular, which has put dream home ownership out of reach for many Canadians, and landlords underwater.

Next, focus on exactly what the client can afford based on a review of income, assets and overall financial objectives. Then setting up a budget and savings plan over a defined period of time can help clients proactively meet the stress test. 

Also reassuring, is that interest rates will stabilize at least temporarily, since it is anticipated that the Bank of Canada will maintain the current 2 percent prescribed rate for 2018’s fourth quarter. That makes this fall a great time to “get ready” to buy, when the right home at the right price becomes available. Success in most things in life occurs when opportunity meets preparedness.

If you’re reading this as a prospective buyer who is uncertain how the existing mortgage rules and market impact your ability to enter the housing market, it’s wise to seek advice from a savvy financial advisor. For example, a Distinguished Financial Advisor or Real Wealth Manager, who can help establish debt management strategies to help you invest in real estate you can afford– while overcoming the limitations introduced by the current economic situation.

For more insight on effective strategies and interpretations about Bank of Canada prescribed rates and inflation, we also recommend reading some of our previous coverage on these subjects:

• “Inflation Hits High Point: Continues Upward Trend to 2.5%”
• “Housing Affordability: Borrowers Take a Hit from Rising Interest Rates”
• “Rising Interest Rates on the Horizon: Who Will Feel the Impact?”
• “Tax Tip: What’s Deductible When Interest Rates Rise?”

Additional Educational Resources:

1. Help Canadians with issues like these – learn more about Knowledge Bureau’s customizable online curriculum options, including those that will earn you credits towards DFA or RWM designations. Register before September 15, 2018, for tuition savings! Free trials are available of many courses.
2. Pick up a copy of Evelyn Jacks’ Essential Tax Facts – it’s an essential tax resource for Canadians managing their finances throughout every life stage, as well as professionals in the tax and financial services.

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