New Mortgage Stress Test Rules Affect Buyers

The federal government has introduced tighter mortgage qualification rules in an effort to cool Canada’s hot housing market.

The new minimum qualifying rate of 5.25%, known as the ‘stress test,’ came into effect June 1. (Prior to this, the benchmark rate was 4.79%.) Its purpose is to ensure homebuyers aren’t stretching their budgets to the max and they will still be able to make their monthly mortgage payments when interest rates go up. The fallout is it’s now not only harder to qualify for a mortgage but some people have less purchasing power. This is expected to have the biggest impact on first-time homebuyers.

Here’s how it works.

When you apply for a mortgage, including a joint mortgage, you’re offered a contracted rate or your actual mortgage rate. However, your bank (or lender) needs to confirm that you’ll be able to pay back your mortgage, even if your mortgage rate rises during your mortgage term. To do this, they check your ability to make your payments based on either the new benchmark rate of 5.25% or the interest rate offered by your lender plus 2%, whichever is higher. So, if your lender offers a rate of 2.89%, you’ll have to use the 5.25% qualifying rate in your stress test. If your lender offers a rate of 3.39%, you’ll have to qualify using a rate of 5.39%.

How does this impact how much you can afford?

Let’s take an example from Bank of Montreal. Assume you have a household income of $100,000 and a down payment of $100,000. You might have been able to afford an approximately $463,000 home, based on a mortgage rate of 2.24% and previous qualifying rate of 4.79%. With the new qualifying rate of 5.25% and same mortgage rate, the maximum home price you could afford is now reduced to around $447,000 (roughly 4% lower). To afford the same home as before under the new stress test rules, you would need to make up the difference by adding $16,000 to your down payment.

The stress test applies to high-ratio or default-insured mortgages — down payment is less than 20%, the borrower requires mortgage insurance and the maximum amortization period is 25 years — as well as uninsured or conventional mortgages (down payment is 20% or more and a 30-year amortization period is available).

If you already have a mortgage, you’ll also face the stress test should you decide to refinance your home, take out a homeowner line of credit or switch to a new lender. It does not apply if you renew with the same lender.