The Mortgage Stress Test:
Understanding Your Options

The Mortgage Stress Test: What It Is and Understanding Your Options

Your First Home

One of the first things that a young couple envision for themselves is buying a new home and possibly starting a family. In addition to having a home to live in that they can call their own, there is the added benefit that a home purchase is usually a solid long-term financial investment, especially due to the tax-free growth on the home’s value.

Can You Afford That Home of Your Dreams?

Thinking about buying a home is one thing, affording the home you want to purchase is another, especially if you live in a hot housing market where house values may be out of reach for those young couples or families that are just starting out. How do they get started with a new home in the city they want to work and prefer to live in when house values are so high?

New Federal Affordability Regulations

Another factor is for those couples who have not yet entered the real estate market and purchased their first home, will now need to pass the federally regulated financial or mortgage stress test. Interest rates are very low these days, the government wants to ensure you can not only afford the home you buy today, but also be able to afford that home in the future should interest rates rise.

As of January 1, 2018, anyone applying for a mortgage from a traditional bank (TD/CIBC/Scotia/BMO & RBC), will be subjected to a financial stress-test. The stress-test requires that you prove your income can support a mortgage interest rate approximately 2-2.5% above the average prime mortgage rate. Because of this new stress-test, the borrowing power of young individuals who are just trying to get into the real estate market, has been substantially reduced or removed altogether.


 If Your Bank Won’t Loan You Money, A Private Lender May

As a means for qualifying for a mortgage, some individuals are borrowing money from private lenders, as opposed to conventional banks. A private lender is simply an individual or corporation who is not regulated by the same financial borrowing rules that the conventional banks are. As a result of not being subject to the same financial regulations, private lenders are able to loan money, without requiring the borrower to pass the new financial stress-test, however even private lenders have lending criteria for approval.

While this may seem appealing at first glance, there are costs associated with borrowing money from a private lender, as outlined in our white paper ‘Six Factors to Consider Before Contacting a Private Lender’ which is a good reference for the fees and efforts that are associated with borrowing money from a private lender.

There May Be an Alternative to Private Lending

As an alternative means for young individuals to qualify for a conventional mortgage under the new stringent financial requirements, young individuals may have their parents or close relatives join them as co-owners / co-mortgagors. The result of having a parent or relative join as a co-signor of a mortgage is such that, the parent’s/relative’s income will be added to the young individual’s income, when assessing whether they can pass the stress-test. In some cases, the combined income of a parent/child is enough to pass the financial stress-test and allow the young individual to qualify for a conventional mortgage. While this option is not available to all young individuals, it is recommended that young individuals explore this avenue, as a means for qualifying for a conventional mortgage.

You may want to read NLPC’s ‘Six Factors to Consider Before Contacting a Private Lender’ white paper, which provides additional details about private lending and the need to have a lawyer involved at all steps of a private lending arrangement, and especially prior to engaging with private lending.

Nichols Law Professional Corporation (Nichols Law, NLPC) has been helping clients throughout the Greater Toronto – GTA area, York Region and Markham, with their real estate, estate planning and business legal needs and issues for over 30 years.