The first is the gross debt service ratio (GDS), the percentage of the borrower’s pre-tax income that covers housing costs, including mortgage, heat, and property taxes. The Financial Consumer Agency of Canada (FCAC) says your GDS should be no more than 32%, while the Canada Mortgage and Housing Corporation (CMHC) uses the 39% limit.
Then there’s the total debt service ratio (TDS), which is all outstanding personal debt (including mortgage, car loans, credit card debt, lines of credit, etc.) and cannot exceed 40% of pre-tax income, according to FCAC. The limit is 44% according to CMHC.
Let’s go back to our example of a $400,000 mortgage above, which showed that you should be able to make mortgage payments of $2,385 per month under the stress test rules, assuming the rate offered is 1.78%.
If heating and property taxes brought your total monthly housing costs to $3,000, you would need a pre-tax monthly income of at least $9,375 (or $11,500 per year) to have a GDS of 32% or less. Likewise, based on that income, your total debt load could not exceed $3,750 per month (including your mortgage payment) to have a TDS of 40% or less in this scenario.
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Can I use a mortgage stress test calculator?
Before speaking to a lender or broker, there are many online tools you can use to calculate the affordability of your mortgage. For example, the Canadian Mortgage Qualification Tool will tell you if you are likely to qualify for a particular mortgage amount, using its stress test rules.
Likewise, a mortgage affordability calculator looks at the maximum mortgage you can borrow based on the same qualifying criteria.
What does the stress test mean for borrowers?
The stress test reduces the size of the mortgage buyers qualify for by about 20%, Crawford says. So, unless you can think of a bigger down payment than before, the test also lowers your maximum purchase price.
For example, if there were no stress test at all, a borrower with an annual income of $125,000 and a minimum down payment would be eligible to purchase a home of $750,000 (assuming an interest rate of 2.60% and a 25 percent depreciation). years). But with the current stress test benchmark of 5.25%, the same borrower’s purchasing power drops to just $600,000, she says.
This post What Home Buyers Need to Know About the Canadian Mortgage Stress Test?
was original published at “https://www.moneysense.ca/spend/real-estate/what-home-buyers-should-know-about-the-canadian-mortgage-stress-test/”