With mortgage rates continuing to rise, it’s becoming harder for people to purchase real estate, first time homebuyers especially. There was a time when qualification was based on the actual mortgage payment, however that changed toward the end of 2016 with the introduction of the mortgage stress test.

The stress test significantly limits how much people will qualify for, which can make it challenging for many to get into the real estate market.

While some industry professionals and mortgage seekers have scoffed at the stress test, I’ve always defended it as it serves an important purpose.

But it has one major flaw that needs to be changed.

 

The Benefit Of The Mortgage Stress Test

The reason for the stress test is to protect people against rising rates. 5 year fixed mortgage rates bottomed out at 1.39% for high ratio mortgages in early 2021. At the time, the stress test rate was 4.79%, meaning that mortgage applicants needed to qualify as if the payments were based on 4.79%. 

Fast forward to today and the lowest 5 year fixed rate for a comparable mortgage is 4.74%. 

The stress test has pre-qualified them for the higher rates. 

If qualification was based on the contract rate of 1.39% then rapidly rising mortgage rates could lead to an affordability issue, which could result in a monumental economic disaster. As borrowers were already qualified to make the higher payments at the time they applied for the mortgage, the higher rates would still be affordable…. At least on paper.  That doesn’t mean that rising rates are not uncomfortable for pretty much everyone. But if the stress test was never implemented, then we would have a much bigger problem on our hands.

 

The Major Flaw Of The Stress Test

The stress test was a great idea for the reasons mentioned above. But there is one major exception. 

Mortgage transfers.

For the life of me, I cannot understand why the stress test applies to those looking to transfer their mortgage to another lender offering a lower rate. Whether you’re in the middle of your term or your mortgage is coming up for renewal, there is often lower rate promotions available that could potentially save you thousands by switching to a different lender. But you’re still required to pass the stress test.

WHY????

You’re not borrowing more money.

You’re not accumulating more debt. 

If the stress test prevents someone from switching lenders, then they would have no choice but to renew with their current lender at the higher rate.

Things are already tight for these people, and rising rates aren’t making it any easier. So why on earth would our government tie their hands like this? 

There is zero logic involved here.  They are forcing people who are already stretched thin to pay a higher rate…. For no reason at all.

 

There Is One Exception

If you purchased your home for less than $1 million prior to November 30th, 2016 and have not refinanced your original mortgage then it’s possible to bypass the stress test with many lenders.

Why November 30th, 2016?

This was the date that new mortgage rules were implemented stress test came into effect for all new mortgages.

 

Conclusion

As I mention in my book, the mortgage industry can flat out defy common sense at times. But requiring people to pass the stress test when simply switching their mortgage to a different lender is not just defying common sense. It’s flat out ridiculous. Hopefully one day the people making the rules will come to their senses and open things up to allow more people to save money when switching their mortgage, either at renewal or in the middle of their term.