Understanding the Mortgage Stress Test in Canada

The Stress Test was introduced in Canada in 2017 as a mechanism to tighten the lending market. This was achieved by setting a new benchmark qualifying rate for home buyers.

If you’re looking to buy anywhere in Canada, it’s important you know about the Stress Test and how it affects your purchasing power. It’s also helpful to know what steps are being taken by the Canadian Government to make the housing market more accessible for Canadians.


What is the Stress Test?

The Stress Test is performed when a home buyer in Canada applies for a mortgage. A Buyer will need to prove they can afford to pay their monthly mortgage at an interest rate higher than the rate on their actual mortgage.

What is the benchmark qualifying rate as of 2019/2020?

The posted rate, or benchmark qualifying rate, sits at 5.19 per cent.

When applying for an insured mortgage (less than 20 per cent down payment), the qualifying rate is based on the Bank of Canada’s benchmark five-year posted rate or the rate quoted by your lender, whichever is higher.

When applying for an uninsured mortgage (more than 20 per cent down payment), banks will use the higher of either the five-year posted rate or the lender’s quoted rate plus 2 per cent.

Even if a Buyer is quoted a mortgage rate of 2.99 per cent, they must prove they can afford mortgage payments at 5.19 per cent.

How has this affected Canada’s housing market?

It’s been noted that the Stress Test has reduced Canadian’s home purchasing power by as much as 20 per cent.

It has also impacted current home owners looking to renew their existing mortgage or refinance their home.

Is anything being done to make qualifying easier?

The short answer is yes.

In February 2020, it was announced by Canada’s federal banking regulator that the benchmark rate would be reduced. This was done in an effort to align with the actual conditions of Canada’s housing market.

The change will impact both insured and un-insured mortgages in Canada, ultimately giving Buyers an added boost of purchasing power.

When will this change come into effect?

Effective April 6, 2020, the new benchmark rate will replace the 5.19 per cent benchmark.

The new benchmark will be based on Canada’s median 5 year fixed insured-mortgage rate, plus two per cent.

If calculated today, February 2020, the new benchmark rate would be approximately 4.89 per cent, according to Canada’s Department of Finance.


Next Steps

Are you in need of mortgage advice? If you’re looking to qualify for a mortgage in Victoria, it’s crucial you speak with a Mortgage Specialist.

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