What is a 'Mortgage Stress Test'?

May 05, 2021

Becoming a homeowner is exciting. And purchasing a home is one of the most significant investments for Canadians. While housing prices in Canada have increased, interest rates have remained low. To protect borrowers in case interest rates rise, the government implemented a mortgage stress test. Thus, it is important to understand the stress test, who is affected, what it means for you.

The Canadian mortgage stress test is a set of guidelines from Canada’s top banking regulator.  These guidelines took effect on January 1, 2018. The guidelines outline a process to determine whether a borrower can continue to afford their mortgage payments if interest rates rise. Borrowers are ‘stress tested’ at the Bank of Canada’s posted 5-year mortgage benchmark rate, or at two percent higher than the rate being offered by their financial institution – whichever is higher. These guidelines affect first-time homebuyers, homeowners looking to switch their mortgage and insured/uninsured borrowers. This does not apply if you are just renewing your mortgage with your current lender.

So how does a financial institution calculate the loan amount you will get? They add up all housing costs and debt payments you have or will have. The housing costs include the mortgage payment at the stress test interest rate, condo fees if any, utilities (heat) and property taxes. The debt payments would include car payments, personal loans, student loans, credit cards, lines of credit, and any other debt you may have. The sum of these monthly expenses needs to be around 42% of your income before taxes (gross income). Using the stress test could mean approval for a loan amount 20% lower vs. not using the stress test. 

On June 1st, 2021, the Bank of Canada changed its benchmark rate to 5.25 percent. This gave consumers the potential to qualify for a larger mortgage. However, rising home prices and a competitive real estate market can still make it difficult to buy a home. Especially for first time home buyers. However, there are several alternatives to a traditional mortgage such as a multi-ownership mortgage. This can make purchasing a home more attainable for a first-time homebuyer by sharing your mortgage with a family member or a friend.

Buying a home should be exciting, not scary, so don’t go at it alone. Speak to one of our Lending Specialists about our range of Mortgage Solutions. We have open and closed mortgages, variable and fixed rates, a combination of all and a multi-ownership mortgage.

  • We’ll give you fair, competitive rates – no need for shopping around.
  • We’ll be open and transparent with our mortgage rate pricing, so you’ll always know what you’re getting
  • If interest rates rise, you’ll get the rate we agreed on with our 120-day rate guarantee on fixed-rate mortgages and 60-day rate guarantee on variable rate mortgages.
  • We’ll even help cover your appraisal & legal fees (terms and conditions apply).

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