Table of contents

#1 What is the Canadian Mortgage Stress Test?

#2 The difficulty with getting a mortgage in 2021

#3 Do I need to pass a stress test to qualify for a HELOC?

#4 Do I need to pass a stress test to qualify for a reverse mortgage?

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Throughout Canada, the Canadian Mortgage Stress Test first came into effect in 2018 as a requirement for all federally regulated banks and lending institutions. This test was implemented to slow down a too-hot housing market and to make sure that those who were buying homes could actually afford the mortgages they were applying for. Due to the implementation of this stress test, many people are now unable to qualify for traditional mortgages and need to look for other options.

What is the Canadian Mortgage Stress Test?

In 2018 the Canadian Mortgage Stress Test was implemented as a method to ensure that everyone who was applying for a mortgage could actually afford that mortgage, even in the event that interest rates went up. With low interest rates and a housing market where homes were selling for extraordinary prices, people were taking on much larger loans than had been seen before.

The Canadian Mortgage Stress Test was brought in as a measure to protect lenders and borrowers. Currently, in order to pass the stress test, borrowers must demonstrate they could afford their mortgage even if interest rates were 2% higher than the current interest rate being offered to them, or equal to a benchmark rate (5.25% at the time of writing), whichever is greater.

The difficulty with getting a mortgage in 2021

Mortgages aren't as easy to obtain as they used to be. Previously, borrowers would pass a few standard credit checks and meet basic income criteria. Nowadays, with the stress test in place, getting a mortgage to buy or refinance a home can be a very challenging process. Not only are borrowers required to pass the Canadian Mortgage Stress Test, but there are many other stringent qualifying requirements as well.

A borrower must spend no more than 32% of their total income on their total housing costs, including their mortgage, property taxes, and all of their utilities combined. Also, the debt-to-income ratio must be considered. All of their housing costs, car payments, credit card debt, and any other loans or payments are divided by their income amount. In order to be considered for approval, this total percentage cannot exceed 44%.

This stress test significantly reduces Canadians’ borrowing capacity. This means that home buyers must either come up with a greater down payment amount, decrease their debt load, or look for a less expensive property. If a person is looking to renew their mortgage, switching lenders may pose a problem. The new mortgage company is required to rerun the stress test, and depending upon the borrower's current situation, they may pass or fail. If the borrower decides to stay with their current lender, this company can use their discretion to determine whether or not the stress test is run again.

While there are many stringent requirements to obtaining a mortgage, these policies are in place to ensure that borrowers can still carry their debt and withstand the stress of an interest rate increase, an increase in their debt load, or a reduction in their total income amount.

Do I need to pass a stress test to qualify for a HELOC?

A HELOC, or Home Equity Line of Credit, is a loan that is borrowed against the equity in your home. As your home value increases over time, so too does the amount of equity you can borrower against. A HELOC usually offers lower interest rates than traditional loans and offers a revolving fund source that can be borrowed from and then paid back, much like a credit card.

A HELOC is a good option for many people that already own a home, have a fair bit of equity in that home, and need a loan. There are no specifications on what this loan can be spent on, and since the funds can be borrowed from and paid back continually, it allows for an ongoing fund source that is always accessible.

Unfortunately, these Home Equity Lines of Credit have strict qualifying criteria, including the Canadian Mortgage Stress Test. To qualify for a HELOC, most lenders require that the borrower have a good credit score, a regular and stable source of income, a good debt-to-income ratio, and they must successfully pass the stress test.

Do I need to pass a stress test to qualify for a reverse mortgage?

A reverse mortgage is similar to a HELOC in that it allows you to borrow against the equity in your home. The main differences between these two loan options is (1) reverse mortgages are only for Canadians 55 and older and (2) they don’t have the same strict requirements to qualify that a HELOC does.

In order to qualify for a reverse mortgage, you don’t need a great credit score or a large income, and the Canadian Mortgage Stress Test is not applicable for reverse mortgages since there are no payments required.

With a reverse mortgage, you can qualify to borrow up to 55% of the total value of your home, and you don’t need to pay it back until you pass away or choose to leave your home.

For seniors, there can be many expenses that arise for which a loan may be required. Whether you wish to give a living inheritance to your loved ones, need to fund health care or in-home care costs, need money for renovations, or want to take a dream vacation, access to cash can be a limiting factor.

With the stringent borrowing requirements in Canada, getting a traditional mortgage loan or a home equity line of credit may be difficult, especially if there isn't a regular source of income coming in. In this case, a reverse mortgage may be the perfect option.

Call us at 1-866-88-BLOOM or leave us a message here and one of our Bloom Representatives would be delighted to help you determine whether a reverse mortgage could be the solution for you.

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