Guess you didn’t realize refinancing your mortgage or switching lenders would trigger a mortgage stress test.
Now you need to get creative to find financing you can afford.
How to stare down a mortgage stress test.
When to opt for mortgage renewal vs refinance.
What is the Mortgage Stress Test?
Stress tests tell lenders you can afford your mortgage if interest rates go up. They’re a necessary evil when you use a federally regulated financial institution like a bank to mortgage a home. You’ll be asked to take a stress test when you:
- apply for or refinance a mortgage loan
- change lenders
- or request a home equity line of credit (HELOC).
What You Can Afford or Not
So what can you afford to buy or refinance a home?
Lenders want to know that too and that’s why when you refinance they review your debts, pay stubs, investments, and self-employment or other income to test your credit stability. You pass the test if you can comfortably survive the current mortgage stress test in Canada:
- you can afford interest rates of 5.25%
- or the rate your lender offers plus 2%,
whichever is higher.
For example, if interest rates are up to 3.25%, your lender calculates if you could realistically
make mortgage payments at 5.25%. But if interest rates are higher than that, say 4.49%, your lender adds 2% to see if you could still afford the mortgage at a higher rate (6.49%). Calculate how much you can afford.
Finding Financing After a Failed Mortgage Stress Test
You failed the mortgage stress test. Is foreclosure next? Not if you:
Reduce Your Debts
Make a lump sum payment from your RRSP to reduce the amount you have to borrow. Or take in renters, get a second job, or co-share your mortgage to increase your income. It could bump you over the mortgage stress test.
Avoid Stress Tests
Not all mortgage lenders use the stress test. Ask credit unions or private lenders before you apply. Enquiring first stops lenders from making multiple enquiries to credit score companies that can affect your credit rating. Second mortgage, second thoughts.
Find a Vendor Take-back Mortgage
Search out private investors to swap your uninsured loan for a vendor take-back mortgage. Private mortgages can have generous terms, and you avoid the mortgage stress test.
Tap Family for Guarantees or Mortgages
CMHC allows non-repayable gifts from immediate family towards down payments for high ratio insured mortgages. (Canada Guaranty and Sagen let you borrow the down payment from a credit card or HELOC.)
Most lenders also accept family or others as guarantors or co-signers for mortgages. If being liable for your mortgage payments makes your family squeamish, see if they will buy the home and allow you to rent to own.
When to Get a High Ratio Mortgage
Uninsured mortgages can have higher interest rates. If you are just starting out, try a high ratio mortgage from CMHC, Canada Guaranty, or Sagen™. Paying the loan default insurance premium upfront, instead of amortizing it over the life of your mortgage, reduces your interest expenses. Preparing to apply for a mortgage.
Calculate your mortgage loan insurance premium at Canada Guaranty.
Why You Need a Real Estate Lawyer
Found a new lender and wondering how to discharge a mortgage in Ontario? Your Axess Law real estate lawyer liaises with lenders to finalize the legal documents you need to sign.
Our licenced real estate attorneys handle your mortgage refinance in person or by video conference call. We liaise with the private lender, bank, trust company, or credit union of your choice.
Before you sign for a new mortgage, ask your lender who pays the legal fees. Your lender may agree to pay, or take advantage of Axess Law’s flat rate fees for our all-inclusive services. Using a mortgage lawyer to refinance.
Co-sharing a mortgage or having family be your guarantor? When you need independent legal advice because a mortgage is complex, Axess Law reviews the fine print for you. Get a legal opinion from a lawyer in Ontario.
We check title to property for financial encumbrances before registering your new lender with an Ontario land registry office. Ask us how to add someone to house title (Ontario). Your real estate lawyer can make the arrangements now or later. Why you really should have title insurance in Ontario.
Affordable Legal Services, Anywhere in Ontario
Access lawyers for less in the Greater Toronto Area, Ottawa, or anywhere in Ontario when you buy a home in the GTA, sell, or transfer property. Axess Law’s flat fee real estate lawyers are affordable, and our rates are all inclusive (excluding taxes, disbursements, and third-party charges). Axess Law offers you only the legal services you absolutely need. Your final invoice includes no surprises or hidden charges. Your itemized statement of adjustments is explained when we deliver it, and we answer any questions you have about it.
Find a real estate lawyer in Ontario.
Click here to learn more about Axess Law’s real estate law services.