Written by Sean Cooper
Wednesday, October 2nd, 2019
Are you looking to buy a home or renew your mortgage? The mortgage stress test is something you'll want to pay attention to. It affects how much you'll qualify to borrow with a mortgage. The stress test is something Canadians have been adapting to ever since it was expanded to all types of home mortgages obtained from federally-regulated financial institutions in January 2018.
Recently, the stress test rate has dropped for the first time in three years, making it slightly easier to qualify for a mortgage.
Let's take a look at the change and what it means if you're buying a home or refinancing your mortgage.
What is the Mortgage Stress Test?
The mortgage stress test was introduced by the Federal Government to determine whether a borrower could meet their payment obligations if interest rates increase.
Under the stress test, if you have a down payment of 20% or more, you must qualify for a mortgage based on your offered interest rate plus 2 percentage points or the Bank of Canada's benchmark rate (currently at 5.19%), whichever is higher.
If your down payment is less than 20% (meaning that mortgage default insurance is required for your mortgage) you must qualify for a mortgage based on your offered interest rate or the Bank of Canada's benchmark rate, whichever is higher.
"Stress testing reduces the chances that borrowers won't be able to handle higher payments in the future," says Robert McLister, founder of RateSpy.com. "That's important if, for example, interest rates surge or a borrower's income drops."
Why Did the Mortgage Stress Test Rate Drop?
The mortgage stress test rate dropped because the Bank of Canada's benchmark rate dropped.
"The minimum qualifying rate equals the most common Big 6 bank posted 5-year fixed rate," explains McLister. "On July 17, it dropped because multiple banks lowered their posted 5-year rates from 5.34% to 5.19%."
How Much of an Impact Will the Lower Mortgage Stress Test Rate Have?
A lower mortgage stress test won't have much of an impact in terms of your home buying power, but it's a change nonetheless.
"A drop of 0.15% in the qualifying rate will barely move the needle for real estate. But it gets market psychology moving in the right direction," says McLister.
A lower mortgage stress test boosts housing demand, all things being equal. However, the stress test needs to move appreciably (like 0.50%) to have a meaningful market impact, notes McLister.
Rate Drops in the Future
Only time will tell if we see further cuts to the mortgage stress test rate. In the meantime, if you're curious about how a drop in the mortgage stress test affects you, you might want to speak to a mortgage specialist.