• Stress Test Loophole?

    As you may know, when qualifying for a mortgage, the borrowers must show that they can “afford” the mortgage. That means, only a certain percentage of their income can be allocated to housing costs (mortgage payments, property taxes and heating). This is called the GDS or “Gross Debt Service”. That maximum percentage is usually 39%. So only 39% of your income can go towards housing. If you exceed that, it is considered unaffordable and you don’t get approved.

    What’s The Catch?

    The catch is that when they calculate the mortgage payments, they don’t use your “actual” payments at the contract rate. They add 2% to the contract rate and make sure you can afford THOSE payments. This is to make sure that you will still be able to afford the mortgage if rates go up. This is called the “stress test”.

    What’s The “Loophole”?

    Here’s the loophole: if you originally bought your home with less than 20% down, you paid for CMHC insurance. It cost you a lot. And it was added to your mortgage. That means your mortgage is “insured” and you paid for it. When your mortgage matures or comes up for renewal, you are not subject to the stress test AS LONG AS you haven’t made any changes to your mortgage (you have kept the same amortization, you have not refinanced and you have not changed anything about it). Now, at maturity, you can shop around with different lenders and qualify at the contract rate (not +2%), thereby bypassing the stress test. Again, this is as long as you keep everything status quo.

    Give Me An Example

    For example, let’s say that 5 years ago, you bought a house with 5% down and you got a fixed rate mortgage of 3%. You had to pass the stress test at that time at 5% (3% contract rate + 2% stress test buffer). You had to demonstrate to the government that you could afford a mortgage of 5%.

    Now your mortgage is maturing and the contract rates are at 5.5%. Under normal circumstances, you would need to show that you can qualify for a mortgage at 7.5% (5.5% + 2%). But you can’t afford that. It’s ok – because your original mortgage was insured, you don’t have to add 2%. You qualify at the contract rate of 5.5%. So you have the freedom to shop around to different lenders and “bring” the insurance with you. Seems fair since you paid for it!!

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