For those of you who aren't in the market yet or new to the stress test aren't aware of the power it yields over capping loan amounts from lenders when taking on your new mortgage.Previous to our market bubble where we all saw home values increase over night like a YouTube video gone viral applying for a mortgage was a joyful experience for most.Your broker would qualify you at the rate they were currently offering, personally in my case that was 2.75%.
What does this all mean?
If you're buying a home for lets say $300,000 ignoring the down payment or cmhc fee for generalized sake at 2.75% monthly over 25 years gives you a payment of $1383.This payment then goes against your tdsr (total debt service ratio) which in simple terms means your monthly debts ÷ monthly gross income. Lenders have caps and certain parameters they need to follow so lets say your A rated with a credit score on Equifax in the mid 700's your cap on tdsr would be approximately 44%. So if you have a $60,000 yearly salary you cant exceed 44% in payments including your mortgage, cars, etc. (Things that affect your bureau). Insurances, gym memberships etc do not apply.
44% of 60k is 26,400 ÷ 12 = 2200 monthly.So great news at 2.75% you're $817 below cap prior to adding monthly taxes, hydro, gas, insurance etc on the home leaving little to no room for car payments and other living expenses perhaps on your credit cards.
So where did the stress test play its role?
Previously being able to qualify for a loan based off the rate you'd receive (2.75%) you'd have to qualify at a much higher rate against your tdsr thus lowering your approval amount substantially. On an average of 5.19-5.34% that $300,000 payment is now calculated at $1813 prior to taxes etc. Include your car payment and at $60,000 you no longer qualify.That was prior to the market bubble, now homes are almost double in price, living expenses have increased and the stress test is still in place making it nearly impossible to qualify for a decent home on two incomes let alone one.
The good news
They have announced adjustments coming in 2020 on April 6th to lower our stress test. The unfortunate part is it wont be a significant amount but may make the difference on your tdsr. The most important thing I can stress is qualifying. Its understandable to want that new car or finance that new couch but wait. Wait until after you close on your home. Don't let a new car that depreciates hinder your ability to not only own your home but lose out on building equity and wealth that will in a short period of time surpass what that car price was that you financed for 7 years.