Since its introduction in 2017 by the Office of the Superintendent of Financial Institutions (OSFI), the mortgage stress test has become a vital part of the mortgage qualification process in Canada. Designed to assess borrower’s ability to handle potential interest rate increases, the stress test has implications for both insured and uninsured mortgage applicants. Let’s delve into the details of the stress test and its impact on Canadian mortgage qualifying.
A Brief Overview
Initially implemented in January 2018 for insured mortgages with a down payment of less than 20%, the stress test was later expanded to encompass all mortgage applications, including both insured and uninsured mortgages. Its primary purpose is to ensure borrowers can afford mortgage payments if interest rates rise.
Qualifying Rate and Calculation
The qualifying rate under the stress test is the higher of two options: the benchmark rate (currently set at 5.25%) or the current/target interest rate plus 2%. This rate determines the minimum qualifying income needed to support mortgage payments. As mortgage rates climbed above 3.25% in 2022, the stress test shifted from using the Benchmark Rate to using the contract rate + 2%.
Applicability and Exemptions
The stress test applies to new mortgage applications, refinancing, or switching lenders. However, it does not affect renewals with the same lender. Credit unions, B-lenders, and private lenders are exempt from the stress test. Private lenders, though an option for those who fail the stress test, typically have higher interest rates.
Changes and Calculating the Stress Test Rate
Proposed changes to the stress test (Jan 2023) rate calculation have been delayed, keeping the current methodology intact for now. The qualifying rate can change rapidly, impacting borrowing ability. A higher stress test rate means a decreased borrowing capacity. Negotiating a discounted rate from a mortgage lender will not assist in passing the stress test. It is prudent to maintain an appropriate financial cushion to avoid unexpected surprises as rates can swiftly move against you. To avoid the stress test altogether, a larger down payment or shorter amortization period may be required.
The History of the Stress Test Rate
The stress test rate has experienced fluctuations since its inception. The qualifying rate was at 5.19% in July 2019 and decreased to 4.79% in August 2020. As of June 1, 2021, it stands at 5.25%. Since interest rates increased above 3.25% in 2022, the stress test rate began floating at 2% above the rates. However, when rates fall below 3.25%, the minimum stress test rate of 5.25% applies.
Key Considerations and Impact
The stress test payment is calculated based on the stress test rate and the mortgage amount. Its purpose is to ensure borrowers can handle higher interest rates, promoting responsible borrowing practices. It is important to note that the stress test is required for switching lenders or refinancing.
Navigating the Stress Test for Mortgage Approval
The mortgage stress test is a critical component of the mortgage qualification process in Canada. By understanding its requirements and impact, borrowers can make informed decisions and plan accordingly. Consulting with a mortgage professional is highly recommended to navigate the stress test and explore suitable mortgage options based on individual circumstances. With proper preparation and knowledge, borrowers can increase their chances of securing mortgage approval and achieving their homeownership goals.