Buying a home is one of life’s biggest decisions. And it’s a major financial responsibility, especially if you’re also dealing with debt from your medical training.
Once you’ve decided you’re going to buy, you need to determine what you can afford, the required down payment, estimated costs, mortgage basics and how to get mortgage pre-approval.
Over the past several years, the federal government has been tightening mortgage rules to try to limit how much debt Canadians take on.
The new mortgage rule that became effective January 1, 2018, means all mortgages will now undergo a stress test.
What is a mortgage stress test?
The stress test is a way of making sure borrowers will still be able to service their loan if interest rates climb higher. Even though interest rates are still relatively low right now, the amount you are allowed to borrow has decreased.
In October 2016, the government introduced the stress test for insured mortgages only—those with down payments of less than 20%. Now the stress test will also apply to uninsured mortgages—those with down payments of 20% or more.
The stress test requires that borrowers must be able to pay off a mortgage using an interest rate that is the greater of:
- the Bank of Canada’s five-year benchmark rate (currently 5.14%); or
- their negotiated rate + 2%.
You’ll get less house, but how much less?
Let’s take a look at this example:
Dr. Ellen Wise, a 32-year-old PGY4 in Toronto, and her husband are ready to buy a home. Together, they have a current household income of $150,000 before tax. Thanks to family help, they have a down payment of $200,000.
At their bank, the negotiated rate for a five-year term and 25-year amortization is 3.5%.
If they had bought a house before the broader stress test came into effect, they would have qualified for a maximum mortgage amount of $800,000 (with an interest rate of 3.5%), for a maximum house price of $1 million.
But the stress test says they must use 5.5% instead. That means they can now qualify only for a maximum mortgage of $655,317 instead of $800,000—a difference of $144,683. (For simplicity’s sake, no other debt or housing expenses were included in the calculation.)
Dr. Wise’s maximum mortgage is reduced from $800,000 (pre-stress test) to $655,317.
Their monthly mortgage payments will still be based on 3.5%, but they will qualify for a lower maximum mortgage.
Exceptions to the rule
There are three exceptions, where the stress test is not applied.
Mortgage renewal: If you renew your mortgage with your existing financial institution/lender, the stress test rules won’t apply.
Existing mortgage applications: If you’ve received approval for a mortgage already, the new rules won’t affect your mortgage, regardless of when it closes.
Credit unions: The rules apply only to federally regulated financial institutions, not credit unions. Certain credit unions may choose to apply the same stress test, so be sure to find out before you apply.
Before you start looking for a home, use MD’s mortgage calculator to explore your mortgage options. The right information can help you choose a mortgage solution that fits your life.
About the Author
Seluman Baig-Mirza, CIM, is a Wealth Lead with the Early Career team at MD Management Limited. He specializes in banking solutions, particularly for medical students and residents.More Content by Seluman Baig-Mirza