How To Avoid The Mortgage Stress Test.
The Mortgage Stress Test is a qualifying measure put in place to encourage borrowers not to overextend themselves on mortgage credit and to secure financial institutions from potential mortgage default.
The Stress Test applies to all federally regulated financial institutions although other lenders have likewise embraced the stress test as part of their mortgage qualification process. Multiple regulators supervise major banks in Canada including Office of the Superintendent of Financial Institutions (OSFI) that oversee judicious supervision and Financial Consumer Agency of Canada (FCAC) which regulates consumer protection. The Stress Test applies to major banks or any financial institution that complies with the Bank Act.
Credit unions are lenders that establish their banking system separately from major banks. What makes credit unions different from major banks is instead of having clients and earning profits, credit unions have “members” and redistribute their revenue throughout the credit union, making it better for everyone. Therefore, they are not-for-profit corporations. Regulation of credit unions take place at the provincial and territorial level in Canada, which is why they don’t have to comply with the Mortgage Stress Test although some of them still do. In Ontario, the Ministry of Finance, the Financial Services Commission of Ontario (FSCO) and the Deposit Insurance Corporation of Ontario (DICO) regulate most credit unions, although some get regulated federally.
So, how to avoid the Mortgage Stress Test?
If you are purchasing a property with less than a 20 percent down payment, it doesn’t matter which financial institution you apply with. Both credit unions and major banks have to follow Federal Law when the mortgage requires high-ratio mortgage insurance, which means all applications of this nature will be stress-tested. However, if you have over 20 percent available or are refinancing the mortgage on your primary residence, you can apply with select credit unions to avoid the stress test. You will only need to qualify at the contract rate and not 2 percent higher.
I work with large and reputable credit unions that do not adhere to the stress test and that can use a 30-year amortization period (instead of 25) to qualify borrowers which reduces monthly mortgage payments and ultimately makes qualifying easier.
If a major bank has turned you down for mortgage financing, why not explore an approval through your local credit union? I can help. Call today or submit an application online!
By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929