The mortgage stress test - Everything you need to know
January 23, 2019 | by QualicoCommunities
Owning a home is still very much a big part of the Canadian dream. As exciting as home ownership is, it comes with a lot of financial responsibility. The first and most important step towards purchasing your own home is figuring out how much you can afford and getting approved for a mortgage, and this involves going through a mortgage stress test.
In 2016, due to Canada’s problem with rising household debt and in attempts to cool hotter buying markets, the Office of the Superintendent of Financial Institutions (OSFI) implemented a mandatory mortgage stress test. Initially, the stress test was intended for future homeowners applying for high ratio mortgages – that is, mortgages with lower down payments and short terms of less than five years. However, as of January 1, 2018, the OSFI extended the stress test to all potential homeowners – this includes buyers seeking mortgages with large down payments, and homeowners whose mortgages are up for renewal or are seeking to upgrade.
What is the mortgage stress test?
For buyers looking to get a mortgage through regulated lenders such as banks, you will need to prove that you can afford a home at the “minimum qualifying interest rate” (5.34% at the time of writing). The minimum qualifying rate is usually higher than the interest rate in your mortgage contract. The mortgage stress test is done in order to ensure that homeowners only buy houses they can truly afford, despite effects of external factors such as loss of employment, increased interest rates etc.
How is the stress test rate calculated?
The minimum qualifying interest rate for your mortgage stress test depends on what category you fall into – are you looking for a down payment of less than 20%, or is your down payment 20% or more? For those with down payments of 20% or more, the minimum interest rate qualification is either the Bank of Canada’s (BOC) five-year benchmark rate or the interest rate offered by your lender plus an additional 2%. Whichever option is higher serves as the minimum qualifying interest rate for your stress test.
For buyers who qualify for a downpayment of less that 20%, the stress test rate is the higher option between the Bank of Canada’s (BOC) five-year benchmark rate and the interest rate offered by your lender without the additional 2%.
What does this mean for homeowners?
Canada’s mortgage stress test ensures that everyone can own a home without going into unreasonable amounts of debt that they’re unable to pay off. The stress test also ensures that you’re protected against unforeseen circumstances, such as higher interest rates, which may affect your finances. In such situations, due to having a smaller mortgage, you’ll still be able to make your monthly payments.
Thanks to the mortgage stress test, potential homeowners are able to afford homes without the fear of acquiring large amounts of debt. While the stress test has without a doubt cooled the market, buyers can be sure that no matter the situation, they will be able to afford and maintain payments for their homes.