What You Need to Know About the Upcoming Changes to the Mortgage Stress Test

The mortgage stress test first came into effect in 2018. At that time our bank regulator, The Office of the Superintendent of Financial Institutions (OSFI), implemented a mortgage stress-test for all new borrowers to ensure Canadian homeowners would be able to afford their mortgage payments should rates increase in the future.

When you apply for a mortgage, you’ll receive a contracted interest rate – which is the actual rate that’ll be used to calculate your mortgage payments and effectively represents your cost of borrowing. The stress test requires you to qualify for a mortgage at a higher theoretical rate (the stress test rate). So, while a stress test can decrease the maximum mortgage amount you qualify for, it won’t affect your mortgage payments in real dollar terms.

 Last week OSFI confirmed its decision to increase the stress-test rate used to qualify uninsured mortgages (for purchases with more than 20 percent down payment) from the current 4.79 percent to 5.25 percent. The federal Department of Finance followed suit, confirming that the stress test rate used to qualify all default-insured mortgages (for purchases with less than 20 percent down payment) will also increase from 4.79 percent to 5.25 percent on June 1st.

What this means is that after June 1st, if you’re seeking a mortgage you will need to pass a stricter stress test and prove you can afford payments at a higher qualifying rate. The minimum qualifying rate for all mortgages will be the greater of the contracted rate plus 2 percent or 5.25 percent – whichever is higher.

Affordability impact

This change reduces the amount of mortgage a household can qualify for by about 5 percent.

For example: a household with an annual income of $100,000 and a 20 percent down payment - with a 5-year fixed mortgage rate of 1.78 percent amortized over 30 years – would qualify for a home valued at $651,000 under today’s 4.79 percent qualifying rate.

Under the new stress test rate of 5.25 percent, the same household’s maximum affordability would decrease to $618,000. That’s a difference of $33,000 (or 5 percent).

Get a Pre-Approval before June 1st

If you are currently shopping for a home, it’s a good idea to get a pre-approval in place now as OSFI is allowing lenders to grandfather the current stress test rate for those that have a pre-approval dated before June 1st. The grandfathering rules will be at each lender’s discretion so having a pre-approval is not a guarantee. Although it could mean the difference between being able to qualify for the mortgage you need or not.

Don’t Stress the Stress Test

Don’t believe the media hype! Yes, buying power may be reduced for some but not for all! Work with a mortgage broker who can help you understand what you can afford and who partners with multiple lenders and credit unions to give you more options. Many lenders do not have a stress test in place or have a more lenient stress test. Call your mortgage broker for a guidance and peace of mind!