For many Canadians, buying a home is the natural next step after completing their education and securing a stable job. Homeownership has long been considered the Canadian dream. While saving for a down payment is often seen as the first major milestone in the home-buying process, fewer people are aware of the mortgage stress test.

What is the mortgage stress test, and why is it important?

In simple terms, the mortgage stress test is a tool used by lenders to assess whether borrowers can still make their mortgage payments under financial strain. This includes scenarios like losing a job, facing unexpected expenses, or dealing with rising interest rates.

How does the mortgage stress test work?

Before being approved for a mortgage, borrowers must pass the stress test. This involves proving that they could afford their mortgage payments at an interest rate higher than the one they would actually pay. Specifically, lenders use the greater of:

A rate of 5.25%, or

Your contract rate plus 2%.

For example, if your contract rate is 5%, the stress test will evaluate whether you can manage payments at 7%.

Passing the stress test is mandatory for most borrowers working with federally regulated lenders. However, borrowers can avoid the test by choosing non-federally regulated lenders, like credit unions.

Even existing homeowners may need to pass the test when refinancing their mortgage or taking out a home equity line of credit (HELOC).

Why was the stress test introduced?

The mortgage stress test was designed to reduce the risk of loan defaults, particularly in a volatile market. By ensuring that borrowers can handle higher interest rates or financial challenges, lenders aim to minimize their exposure to risk.

However, the stricter qualifying criteria have impacted many Canadians. The higher test rate has reduced purchasing power, meaning some buyers qualify for smaller mortgages than they would have in the past. This has also made it harder for current homeowners to renew their mortgages, especially with rising home prices, higher interest rates, and lingering financial effects of the pandemic.

What changes have been made recently to the stress test?

In response to industry pressure and today’s elevated interest rates, the Office of the Superintendent of Financial Institutions (OSFI) announced a significant change to the stress test. Starting November 21, 2024, homeowners will no longer need to pass the stress test when renewing an uninsured (conventional) mortgage with a new lender.

This adjustment provides some relief to homeowners looking to shop around for better rates without being penalized by the stress test during the renewal process.

What is the impact on Canadian homebuyers?

While the mortgage stress test helps protect lenders and borrowers from future financial challenges, it has made homeownership more difficult for many Canadians. The test rate—often much higher than the actual mortgage rate—limits how much buyers can borrow. 

Are there tips for navigating the mortgage stress test?

-Save a larger down payment: A bigger down payment reduces the size of your mortgage, making it easier to qualify under the stress test.

-Work with professionals: Speak with a mortgage broker or financial advisor to explore your options and understand how the stress test affects your borrowing power.

-Partner with a knowledgeable real estate agent: A skilled agent can help you find the right home within your budget.

When you’re ready to take the next step, consult with a trusted professional at The Cliff Barron Team to keep you informed and help guide you through the home-buying process.