Want to buy a house? Then let’s chat about the Mortgage Stress Test

If buying a home wasn’t stressful enough, Canadians now have one more thing to think about when applying for a mortgage. The Stress Test. Introduced in 2018, this pesky little test is for anyone looking to renew or get a new mortgage. No exceptions! If you ask me, they could have come up with a nicer name …

But What is this Mortgage Stress Test?

Plain and simple, it is a set of rules lenders follow to determine someones eligibility for a mortgage. It allows for an added margin of safety in affordability should interest rates take a hike. And it’s actually meant to protect the borrowers.

So How does it work?

When applying for a mortgage, the lender will determine a mortgage loan amount by examining income levels, debt ratios and interest rate. That’s standard. Under the stress test, the interest rate that sis offered is not the rate the lender will use to determine the mortgage eligibility. Basically, the lender will use the same calculation they would use to determine loan affordability but with a higher rate.

Originally, the stress test rate was set at either 2% above the contract rate you were offered, or the posted Bank of Canada five-year rate, whichever was higher. Now, with the onset of the COVID-19 Pandemic, the Office of the Superintendent of Financial Institutions (OSFI) has decided to modify the stress test starting June 1, 2021. Since June 2021, the set rate that will now be reviewed annually. Today the rate used is a minimum of 5.25%, or your offered contract rate plus 2%, whichever is higher.

Was that a lot of mumble jumble? Let me give you a real example! Let’s say Sammie wanted to borrow $400,000 and the lender is offering a rate of 1.78%. Sammie would have to prove they can afford a mortgage payment of about $2,385 per month (calculated at 5.25%), even though Sammie’s actual monthly mortgage payment (at 1.78%) would only be about $1650. Does that make sense?

The Bottom Line

Though the mortgage stress test is still a relatively new thing that borrowers must understand, it seems, for the time being, that it’s here to stay. Especially amid the high prices of homes and the huge demand. It is important that you are educated on the Stress test so you can have the best shot at buying your dream home.