Here’s What You Need to Know About the Mortgage Stress Test Rules

A mortgage stress test was introduced in late 2017 by the federal government for anyone applying for or renewing a home loan. But, if you’re like half of Canadians questioned by TD Bank in 2019, you might be confused about what the test is and who it impacts.


And, with the recent announcement that the stress test will change on June 1, 2021, Canadians are even more confused. But make no mistake the mortgage stress test isn’t going away. It’s just now adapting to the present home market conditions.

According to Ann-Marie Rasiawan of Mortgage Architects, a mortgage brokerage based in Mississauga, Ontario, “Even if you have excellent credit and a 20% down payment, you still have to go through the mortgage stress test”.

In other words, if you have or want to get a mortgage, you’ll need to go through a stress test. Before you apply for your next home loan, here’s what you should know:

What Is the Mortgage Stress Test?

The mortgage stress test isn’t a test. Rather it’s a new set of rules that banks must follow to decide if you qualify for a mortgage and if so, how much you may borrow.

A stress test is a method of determining how much you can afford (and under what circumstances). Would you be able to continue making mortgage payments if your income is reduced or you lost your job? What happens if interest rates rise, or if you need to refinance your house?

This type of rainy-day preparation is critical for several reasons. First, interest rates change and home prices fluctuate as well. According to the Canadian Real Estate Association, the average home price in Canada in April 2021 was over $695,000, up a whopping 41.9 percent over the previous year. Knowing you can still pay your mortgage if interest rates rise is crucial, and it might influence the type of property you buy.

How Does the Mortgage Stress Test Work?

When you apply for a mortgage, the bank will provide you with an interest rate depending on your credit score. However, the lender will not consider that rate to assess your mortgage eligibility if you go through a stress test. Rather, it will calculate those payments at a far higher interest rate to ensure that you can make your payments if/when rates go up.

So, what will your lender’s interest rate be? As of June 1, the minimum qualifying for both insured (with less than a 20% down payment) and uninsured (with at least 20% down payment) mortgages will be higher of the following:

• Your lender’s rate plus 2% or
• 5.25% (up from 4.79% before June 1)

To put it another way, if you wanted to borrow $400,000 and your lender offered you a rate of 1.78 percent, you’d have to show you can afford a monthly mortgage payment of about $2,385 (at 5.25 percent), even though your actual monthly mortgage payment (at 1.78 percent) would be much lower: around $1,650.

In contrast, Borrowers who took for a $400,000 mortgage before June 1 had to show that they could afford a monthly payment of around $2,280 (at 4.79 percent), or about $100 less than the updated standards. (If you had your mortgage pre-approved before June 1, your lender can use the previous stress test parameters) Obviously, the more you’re borrowing, the greater that difference will be.

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