Mortgage Stress Test Calculator with wooden house and coins stack and pen on wood table. Property investment and house mortgage financial concept

The Mortgage Stress Test

Looking to Invest in the Housing Market?

If you’ve been looking to start investing in the housing market, there are somethings you’ll need to know first. If you’re just starting out, there’s a chance you’ve probably heard of the Mortgage Stress Test. This test determines how your mortgage and finances might be affected by any sudden change when it comes to your financial situation, such as unemployment. 

Canada’s banking regulators have suggested some new rules for the Mortgage Stress Test, this was due to the ongoing COVID-19 pandemic. Which has resulted in many people finding themselves unemployed, causing the housing market to soar to record highs. However, the new rules will now make it harder for these potential new homebuyers to qualify. 

What is the Mortgage Stress Test? 

According to the Office of the Superintendent of Financial Institutions (OSFI), the Mortgage Stress Test is designed to prepare buyers for the financial stress of becoming a homeowner. The test also determines how the homeowner would be able to handle any sudden change to their financial situation that could affect their mortgage payments. It’s giving them a glimpse at what the high expense of buying a home. 

All buyers in Canada are required to take the Mortgage Stress Test in order to determine if their mortgage loan is even viable for them. It’s also based on their income, property tax and any other debt they might have at the time. Then borrowers can help to complete the evaluations of the potential homebuyers finances, determining what mortgage payment would be right for them. 

How I Pass the Mortgage Stress Test?

The Mortgage Stress Test was revised in April 2021, in order to pass the test now, you’ll need to prove that you qualify at either your contracted mortgage rate plus 2 per cent, or at the Bank of Canada’s five-year benchmark rate of 5.25 per cent – which ever is higher. 

For example, “if you buy a house at the purchase price of $500,000, make a 20 per cent downpayment, and receive a rate of 3.8 per cent, you are required to pay a monthly interest rate of $1,401.63.” In order to complete the Stress Test, you have to be able to prove that you can pay 5.25 per cent or $2,492.15 per month in mortgage rates. The issue is that for some homebuyers, they might default if they aren’t prepared for this sort of payment. 

Homebuyers Are Reconsidering What They Can Afford

This new Stress Test is now causing some potential first-time homebuyers to reconsider what they can afford. It’s been recommended that borrowers should take time to evaluate their finances with their banks, and with the help of a realtor. 

Due to the current housing market, which is is hot, the government regulators have upped the Stress Test. While the interest rates have remained historically low, this has caused the housing market to be flooded with buyers. In order to cool the hot market, the government has decided to institute this new benchmark qualifying rate for uninsured mortgages. 

The Office of the Superintendent of Financial Institutions

The OSFI is now concerned about homebuyers ability to pay their mortgage loans. While banks lenders are now worried that the homebuyers are over reaching in this very highly competitive market. 

“Given elevated levels of household debt and the risks that households may overstretch in the face of rising housing prices, we welcome the recent proposal by the Superintendent of Financial Institutions to introduce a fixed floor to the minimum qualifying rate for uninsured mortgages.” – Tiff Macklem, governor of the Bank of Canada

The test is most likely to have an impact on the housing market. The new Mortgage Stress Test rules will help to ensure that when someone is buying a home at a low-rate, that they can handle a potential increase in their mortgage payments. The 5.25 per cent point Stress Test is going to take effect in June 2021. 

Contact Lori VanDinther 

If you have any questions about the new Mortgage Stress Test, please contact Lori and her team today. They will be happy to help you make the move to becoming a homeowner. 

Please contact Lori VanDinther and her team today if you’re interested in buying or selling your home. If you’re interested in learning what your home is worth, try our free home evaluation.