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As if mortgages weren’t already a challenge to get approved for, the mortgage stress test can make it an even bigger hurdle to climb over. If you’ve decided to buy a home in the near future, applying for a home loan will go hand in hand with this transaction.
But you’ll need to meet certain criteria in order to get a stamp of approval on your home loan application, and undergoing a mortgage stress test is part of the process.
So, what is the mortgage stress test, and is there any way for you to avoid it?
Why Does The Mortgage Stress Test Exist?
The mortgage stress test is designed to protect both borrowers and lenders from any defaults on mortgages that would put both demographics in a precarious position. When a borrower defaults on a mortgage, they put themselves in a position to potentially lose their home. And for lenders, this means having a delinquent loan asset in their hands that they need to deal with in order to recoup as much as they can.
The purpose of the stress test is to make sure that borrowers are financially capable of maintaining mortgage payments, even if rates increase throughout their mortgage term. Many Canadians often have far too much debt on their plates to handle. And in the face of increased household debt, adding more debt to the pile by means of a mortgage can spell trouble.
The mortgage stress test was implemented to deal with this mounting household debt issue. While some people may be able to handle a mortgage at today’s posted interest rate, many may not be able to handle their mortgage payments if rates increase. For this reason, the mortgage stress test requires that borrowers qualify for mortgages at higher rates than what they are actually offered by their lender.
The rules of the mortgage stress test are changing slightly and will require borrowers to qualify at their lender’s contract rate for the weekly median 5-year fixed mortgage rate (for insured mortgages), plus 2%, whichever is greater. These new rules are to take effect by April 6, 2020.
The question is, can you avoid this test?
When You Should Consider Avoiding The Mortgage Stress Test
You may be worried that you won’t be able to pass the mortgage stress test because of any of the following:
- You have a low credit score
- You are self-employed
- Your debt-to-income ratio is high
If anyone of these apply to you, you may have considered looking for loopholes that will allow you to avoid the stress test altogether. The truth is, you may be able to.
Ways To Avoid The Mortgage Stress Test
Big, traditional banks offer federally-regulated mortgages that may be subject to stress testing. But there are a slew of alternative lenders out there that offer mortgages and do not need to subject their clients to the mortgage stress test. In this case, you may want to seek out one of these alternative lenders so that you don’t have to undergo a stress test that would otherwise be implemented by a conventional bank.
More and more lenders – including prime lenders – are offering mortgage products that are designed to avoid the mortgage stress test, such as:
- Mortgage Finance Companies (MFCs)
- Private Lenders
- Mortgage Investment Corporations (MICs)
- Credit Unions
Out of these, private lenders might be the easiest to get approved with because their lending standards are not as strict. However, you may be subject to higher interest rates in exchange for easier mortgage approval with a less-than-stellar financial profile.
If you are concerned that your employment situation, debt load, and credit score could cause you to fail the stress test, you may try to avoid taking this test by applying for a home loan with a lender that will not require this test.
Wondering about CMHC fees? Find out if you avoid the the CMHC insurance fees?
Benefits Of Using Alternative Lenders
For starters, you can avoid the mortgage stress test by working with an alternative lender. In this case, you may find it easier to get approved for a mortgage. Other benefits of working with an alternative lender include:
- Quick mortgage application and approval
- Quick deposit of funds after loan approval
- Low credit scores may be accepted
Drawbacks Of Using Alternative Lenders
While getting approved for a mortgage may be easier with an alternative lender, there are some drawbacks of working with these types of lenders that you should be aware of before you apply for a home loan this way:
- Interest rates will likely be higher compared to traditional lenders
- Loan limits may be smaller
- Risk of the lender going out of business
- Potential hidden fees
Be sure to assess the lender carefully before you decide to work with one. While you may want to avoid undergoing the mortgage stress test in order to ensure mortgage approval, you also don’t want to inadvertently put yourself in a precarious position that will make paying your mortgage difficult. Avoid the temptation to overleverage yourself. Instead, work with a reliable lender who has your best interests at heart.
Going through the mortgage stress test is already a bit of a bother. But you may be able to avoid having to be subject to it if you take non-traditional channels. Be sure to work with a lender who can offer you the best terms and rate for your mortgage so it suits your budget appropriately. If you’re interested in being matched with an alternative mortgage lender, Loans Canada can help connect you with one who can best meet your needs.
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.
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