A mortgage stress test is conducted by your mortgage lender to see if you are able to keep up with your mortgage payments should interest rates increase. All federally-regulated lenders are required to conduct a stress test, and the stress test is done when you apply for a new mortgage, switch lenders, or refinance your mortgage.
The mortgage stress test will reduce the amount that you are eligible to borrow compared to current rates, or may even disqualify you from a mortgage with a bank or credit union. Your ability to afford mortgage payments is compared against the Bank of Canada’s Five-Year Benchmark Rate, known as the qualifying rate.
A stress test is calculated by finding out what your mortgage payments would be if interest rates rise to a value called the qualifying rate. This qualifying rate differs depending on whether your mortgage is insured or uninsured.
If your mortgage is uninsured, then the stress test will be calculated at a qualifying rate which is the higher of
If your mortgage is insured, then the qualifying rate is the higher of
A mortgage stress test is done when you apply for a new mortgage with a federally-regulated lender. It is also done anytime you switch lenders or when you refinance your mortgage. A mortgage stress test is not done when you are renewing your mortgage with the same lender.
Failing a mortgage stress test means that you will be ineligible for a mortgage at any federally-regulated lender. This includes all of the Big Banks in Canada, including RBC and TD.
If you have failed the mortgage stress test, or you are looking to avoid it, you may consider un-regulated lenders, such as private mortgage lenders. Private lenders are not required to conduct a stress test and they are generally more flexible in their lending requirements, such as if you have a bad credit score or if you are self-employed. However, private mortgages come with much higher mortgage rates, even in excess of 10%.
Switching lenders or refinancing your mortgage also means that you will have to undergo another mortgage stress test. Staying at the same lender means that you can avoid the stress test, but it might mean that you can miss out on better mortgage rate offers at other lenders.
|Same Lender Renewal||No|
Your mortgage affordability is based on your down payment, GDS ratio, and TDS ratio.
Your Gross Debt Service (GDS) Ratio is the percentage of your housing costs compared to your monthly income. Housing costs include your mortgage payment, property taxes, and condo fees, depending on your property.
Your Total Debt Service (TDS) Ratio is the percentage of your housing costs plus other debts that you may have, such as credit card balances or car loans and student loans, compared to your monthly income.
The Canada Mortgage and Housing Corporation introduced changes that would be implemented on July 1, 2020 for new insured mortgages. A minimum credit score of 680 would be required to qualify for CMHC insurance, as well as a GDS ratio of 35% and TDS ratio of 42%.
The CMHC also will not accept non-traditional sources for your down payment that increase your level of debt, such as if you took out a personal loan for your down payment.
You can use a mortgage stress test calculator to see if you can pass the stress test by estimating your current GDS and TDS ratios, as well as seeing whether your down payment meets the minimum requirements.
|Minimum Credit Score||680|
|Minimum Down Payment||5%|
Currently as of January 2021, the stress test is tested at a rate of 4.79%. This is the lowest it has ever been since the stress test was first implemented in 2018.
The 5-year conventional mortgage rate is the average of the weekly posted interest rates for a five-year mortgage by Canada's six major chartered banks. This rate is updated every week on Wednesday.
The stress test rate, also known as the qualifying rate or the Bank of Canada's five-year benchmark rate, is based on the posted five-year fixed mortgage rates from Canada’s Six Big Banks, including RBC, TD, Scotiabank, BMO, and CIBC. This rate is updated weekly.
There has been criticism towards the use of posted mortgage rates, as posted rates are often kept artificially high in order to inflate prepayment penalties. Proposed mortgage stress test changes would have altered the qualifying rate to be the actual rate that new mortgages are set at instead of the posted rate before any discounts, however these changes have been delayed.
As of January 2021, the benchmark rate for both insured and uninsured mortgages is the five-year conventional mortgage benchmark rate, which is currently 4.79%.
If the stress test rate increases, the amount that you can borrow will decrease. For example, consider a $500,000 home with a 5% down payment, with your annual income being $90,000 with no expenses or other debt. At the current qualifying rate of 4.79%, you will pass the stress test.
However, if the qualifying rate increases to 5.34%, then you will fail the stress test. Even a qualifying rate of 5.19% will disqualify you from a mortgage.
The qualifying rate can change rapidly and it can quickly disrupt your financial plans. The qualifying rate was last at 5.19% in July 2019, and yet fell to 4.79% in August 2020. This means that in the scenario above, you would not have qualified for a mortgage in 2019, but you would have qualified in 2020.
Even so, rates can swiftly move against you. Keeping an appropriate cushion can help you avoid unexpected surprises should rates change.
Since the rate used is either the greater of the Bank of Canada’s qualifying rate or your current mortgage rate, this means that negotiating a discounted rate from your mortgage lender will not help you pass the stress test.
The mortgage stress test was created in 2017 by the Office of the Superintendent of Financial Institutions (OSFI) with it being implemented starting in January 1, 2018 for all mortgage applicants. The stress test has been applied for insured mortgages since 2016. The stress test was initially only for insured mortgages with a down payment less than 20%. Later changes made it so that the stress test applied to all mortgage applications, for both insured and uninsured mortgages, and no matter the amount of your down payment.
|October 25, 2017||4.99%||-|
|January 17, 2018||5.14%||+0.15%|
|May 9, 2018||5.34%||+0.20%|
|July 10, 2019||5.19%||-0.15%|
|March 18, 2020||5.04%||-0.15%|
|May 20, 2020||4.94%||-0.10%|
|August 12, 2020||4.79%||-0.15%|
Source: Bank of Canada