With the stress test, borrowers will find out how well they are able to meet their debts even if rates skyrocket. If successful, they should not have to worry about a catastrophic economic situation in the future. The banks, on the other hand, will not be left with a pile of files related to non-creditworthy borrowers, unable to pay their debts when due.
How do you perform the calculation in the mortgage stress test?
To see if you pass the mortgage strength test, a more or less complex calculation is required. First of all, in the stress test, we will have to determine an “extreme” rate percentage that will be used to calculate the amount of the monthly payment to be paid via this percentage.
To find this extreme rate percentage, you take the higher value between :
- The Bank of Canada’s reference rate, currently 5.25%, or
- Your mortgage interest rate + 2 points.
For example, let’s say you want to get a loan at 2.5%. The Bank of Canada’s reference rate is 5.25%, while your rate plus 2 points is 4.5%. The rate used in the stress test is therefore 5.25%, since it is the highest.
Then use this rate to calculate the monthly payment you have to make on your loan. Then here are all the numbers you need to add together:
- Stress test monthly payment amount;
- Annual property taxes divided by 12;
- Average monthly heating bill (if you’re not sure, use $150);
- Plus 50% of monthly condo/maintenance fees, if applicable.
This total gives the monthly housing expenses. If it is less than 39% of your monthly income, you pass the stress test.
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