Changes are Coming to the Mortgage Stress Test... or are they?

The federal government originally introduced the stress test in late 2017 as a way to cool the market and also prepare borrowers for the worst case scenario. If a borrower’s income reduced or if interest rates increased the government wanted to ensure that Buyers could afford their mortgage payments and protect borrowers from default.

So how exactly does a Stress Test work? When you apply for a mortgage the bank will offer you a rate based on your debt service ratio, your credit score, and what they’re offering in the market. Today Meridian is offering a rate of 1.69%. So although this would be the rate your mortgage payment is based on it would not be the rate to determine your mortgage eligibility.

So what rate does the lender use? Your lender would confirm your eligibility based on the Bank of Canada’s five year rate OR the rate offered by your lender plus 2%. Currently the stress test is based on the Bank of Canada qualifying rate of 4.79%.

By needing to qualify at the higher percentage point it lessens your overall purchasing power and if you’re a first time home buyer trying to enter the market it does make it a bit more difficult for you.

So, what would change? The Office of the Superintendent of Financial Institutions (OFSI) has proposed to increase the qualifying rate from 4.79% to 5.25%. They are currently collecting input on the proposed change and will announce the final decision by May 24. If they move forward with the proposed increase it would take effect June 1.

What can you do to strengthen your eligibility: save more of a downpayment, pay down other debt, or get a co-signer. Although, it is not certain it may be helpful to have a conversation with your lender and see how this affects your purchasing power.