What Is The Canadian Mortgage Stress Test?
In almost every mortgage process, a borrower will be required to pass the Stress Test, which was introduced in 2016 and then revamped to include all borrowers in 2018. For those that don’t know, the stress test is a calculation to guarantee that the borrower can still qualify for their mortgage in the event that their interest rate rises. It applies to both fixed and variable mortgages that are new, refinanced, switched to a new lender or if you take out a home equity line of credit (HELOC). All borrowers who receive their funding from a federally regulated lender will be required to pass the test. Although, private lenders do not require a stress test, many will still perform it as a way of identifying the risk level of lending to the borrower. It is important to note that no matter who your lender is, if you are getting an insured mortgaged (less than 20% down payment) you will always have to go through the stress test.
What is the current stress test?
The borrower is required to prove that they can make payments for whichever of the following is higher:
1. Minimum qualifying mortgage rate of 5.25%
2. Borrower contract interest rate + 2%
Note: In times like we are experiencing today where mortgage rates are increasing, it is likely that the stress test will be the contract interest rate +2%
Example:
Min. qualifying mortgage rate = 5.25%
Borrower contract rate = 4.67% + 2% = 6.67%
Therefore, the borrower will need to be able to make payments for a mortgage with a rate of 6.67% to pass the stress test.
If you’re looking to do a quick evaluation to determine if you will qualify for your dream home, you should utilize this link: https://itools-ioutils.fcac-acfc.gc.ca/MQ-HQ/MQ-EAPH-eng.aspx
Some may think that the stress test is a nuisance, however it’s in place to ensure that if rates raise (like we’ve seen recently) and monthly payments increase, the borrower will still be in good standing to afford their home. The stress test ultimately protects the borrower from extreme situations like foreclosure. In some circumstances the results of your stress test may require you to reduce your requested mortgage amount, or have you saving for longer to acquire a larger down payment. In my opinion it is a great idea to get a pre-approval ASAP after you decide you want to purchase a home, that way any potential speed bumps can be dealt with right away. Remember, the stress test is a great safeguard for future circumstances and it’s always better to be patient and prepared than to put yourself at risk of losing your home.
For more information, or if you want to start your pre-approval process, book a meeting with me here.
