What Is The Mortgage Stress Test?

Fivewalls: The Mortgage Stress Test

Last Updated: Feb 15, 2019

A mortgage stress test is ultimately a guideline designed to ensure you will financially be okay if interest rates ever rise and you are not overextending yourself.

How The Mortgage Stress Test Works

The stress test was previously for people putting a down payment of less than 20%, but now all homeowners will undergo the test.

If your payment is less than 20%, you will have to qualify for a mortgage with the minimum qualifying rate set by the Bank of Canada (currently 5.34% for five-year term), which is higher than you will actually be paying. Your income and other expenses (such as other loans) will be taken into consideration.  What you think you can buy versus what the bank thinks you can buy, can be a huge difference.

Before using the stress test, you may be approved for a mortgage of $500,000 with a five-year fixed-rate of 3.95%. Your monthly payments may be around $1,600+. But after using a qualifying rate of 5.34%, that will bump your payments up to $2,200+ and you may have to go with a different home.

If your down payment was more than 20%, the stress test will be calculated a bit differently. It will either be determined with the Bank of Canada’s current rate or your current mortgage rate + 2%. Whichever is higher will be used.

Why Was The Stress Test Introduced?mortgage, mortgage stress test, buying a home

It is not meant to be a burden to people. It really is to benefit you and help you realize what you can afford can afford versus what you think you can afford, especially with interest rates and the cost of housing rising. It is to limit the amount of defaults and debt rates, particularly in Vancouver and Toronto where the housing market is the hottest.

Does It Affect Re-Financing?

If you already have a fixed-rate mortgage term, you will not be affected by the new stress test rules. But when it comes time to re-finance with a different lender, you will face the same test with the Bank of Canada five-year fixed mortgage rate, not your current rate. Just because you were approved for a mortgage years ago does not mean you meet that criteria now, which could also make it harder to open a home equity line of credit.

Something To Consider

You may be tempted to put a 20% down payment if you have it, but you will still be subjected to a much harder test. If you do not qualify, you may have to look at a smaller home or even in a neighborhood that was not necessarily your top choice. You will be building home equity right away and having to pay a lower mortgage, but consider putting 15%, or even 19% down.

Because of the new rules that took affect January 1st of this year, new homeowners and homeowners renewing their mortgages will have a harder time. In order to prove you are not overexerting yourself, make sure you are saving and really do have what it takes to own your home. Remember that everyone will face this test, despite even having an impeccable credit score. You will not have to face the stress test if you are renewing your mortgage with your existing lender, but if you choose to shop around for better rates, you will be affected.

Disclaimer: rates subject to change

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