Mortgage Stress Tests: what are they, and will you pass?

General Melanie Ward 7 Aug

Things just got a little easier in Canada with new changes to our mortgage stress tests. The Bank Of Canada lowered the rates for Canadian mortgage stress tests in July, the first drop since 2016. The mortgage qualifying rate dropped to 5.19 per cent from 5.34 per cent, where it had been locked since May of 2018. This means that it’s a little bit easier to qualify for a mortgage than it has been for a few years.

What is a mortgage stress test?

The “stress test” is a set of rules banks must use to determine if you qualify for mortgage and, if so, how much you can borrow. Everyone, no matter how great their credit rating, has to qualify in order to get a mortgage. This test was implemented to protect Canadians from overborrowing. Interest rates have been at historic lows that can only go up, and our government wants to make sure you’ll still be able to afford your mortgage payments when rates eventually do rise. They want to make sure that when interest rates go up, you won’t have to default on your home.

How does the mortgage stress test work?

The Canadian government has determined that regardless of how low the current interest rates being offered, you have to be able to qualify for a mortgage at the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate of +2%, whichever is greater. What does this mean?

Affordability of higher mortgages is more difficult with the stress test. Before the stress tests were put into place, if you had 20% down you might have been able to afford a mortgage of over $700,000, with the mortgage stress test in place that amount can drop to the $500,000 range. It’s basically been implemented to curb spending and debt loads.

How did the stress test just get a little easier?

By lowering the qualifying rate from 5.34 to 5.19 it allows people to qualify for larger mortgages and more borrowing.

Does this apply to people renewing their mortgages?

No. If you are renewing your mortgage you can just renew it. However, if you are switching banks or lending institutions you will have to qualify for the stress test before you can qualify…even if it’s the same amount as what you were carrying before.

What’s the best way to pass the mortgage stress test?

  • Save up as much as you can for a down payment. The more money you have to put down, the easier it will be to qualify for a bigger mortgage.
  • Keep your Gross Debt Service Ratio healthy. Your housing ( mortgage, property taxes, heating bills etc…) must represent less than 32% of your monthly costs.
  • Keep your TDS (total debt service ratio) low, which represents any personal loans, car loans, mortgage etc…cannot be greater than 40% of pre-tax income.
  • Get a cosigner. For first time home buyers a co-signer can really help.

If your ratios are high, call your Mortgage Broker.  We will assist you through the process!

If you have any questions about this or any other mortgage related issues, please do not hesitate to contact me at Ward Mortgages.