New Mortgage Stress Test Rule
New mortgage rules introduced in 2018 require all Canadian home buyers to undergo a mortgage stress test – even if you make a down payment of 20% or more1. Previously you would only have to stress test your mortgage if you made a down payment of less than 20%.
Why should you care?If you’re buying a home the new mortgage rules will have a direct effect on how much home you can afford. You’ll have to prove that you could still make your monthly mortgage payments if interest rates were to rise in the future. Already have a mortgage? You’ll face a mortgage stress test if you refinance your home, take out a home owner line of credit, or switch to a new lender (but not if you renew with the same lender).
What are the new mortgage rules?Basically the new mortgage rules mean that you’ll have to pass a test. Put away your pencil, it’s not that type of test. It’s called a “stress test” and it’s simpler than the name might imply. The new stress test means that you’ll have to qualify for your mortgage using the “minimum qualifying rate.”
How the stress test rate is calculatedFor uninsured home buyers (anyone who qualifies with a down payment of 20% or more) the minimum qualifying rate is based on either the Bank of Canada’s five-year benchmark rate (5.14% at the time of writing) or the rate offered by your lender plus 2% – whichever is higher. Buyers with default insured mortgages (i.e. anyone who makes a down payment of less than 20%) must qualify using either the Bank of Canada five-year benchmark rate, or the rate offered by your lender (without adding the extra 2%) – whichever is higher.
So if your lender offers a rate of 2.99%, you’ll have to use the 5.14% benchmark rate in your stress test. If you make a 20% down payment and your lender offers a rate of 3.49%, you’ll have to qualify using a rate of 5.49%.
Although the new mortgage rules are supposed to protect the Canadian housing industry (and make sure that Canadians are spending within their means), the changes also mean that you might have to settle for a lower budget.
For example: Let’s say you have a household income of $87,000 and made a down payment of 20%. Before the new rules, you may have been able to afford a maximum purchase price of $508,069 (based on a 2.99% rate).2 Now, because of the 2018 mortgage rules, you’ll have to qualify for a rate of 5.14%. This means you may only be able to afford a maximum purchase price of $393,716, which is 22.5% less than under the previous rules.