Simple Guide to the Mortgage Stress Test

In today’s post, let’s get to the bare bone basics of the mortgage stress test.

Will this Affect Me?

Are you thinking of getting a mortgage loan? Maybe you already have a loan but your term is expiring and you’re thinking of changing lenders? If you answered “yes” for either of these questions, the mortgage stress test will certainly affect you.

Go check out my previous post on Mortgages if you need a refresher on mortgage basics.

What is the Mortgage Stress Test?

The stress test is a regulation introduced by the Canadian government, specifically the Office of the Superintendent of Financial Institutions (OSFI), to bring a higher level of stability to the Canadian financial system. That’s a bit vague – How will this stress test affect me?

When you apply for a mortgage loan, the lender will calculate your maximum loan amount. By adding this amount to your deposit, this becomes the dollar amount that you can afford or your affordability.

Say, for example, a lender offers you an interest rate of 2.5%. Without the stress test, your maximum loan amount would be calculated using 2.5%. By applying the stress test, your maximum loan amount will now be calculated using a higher interest rate. Remembering that a higher interest rate lowers the loan amount, this means that you can no longer afford as much as you did before.

Common misconception: This does not mean you’re paying more interest. In the example above, you will still be making payments on the 2.5% interest rate. The stress test interest rate is only used to calculate your maximum loan amount.

The stress test interest rate will be the higher of:

  • The Bank of Canada’s (BoC) five-year bench mark rate (currently 4.99%) or
  • The interest rate offered by the lender + 2%

Let’s go through two scenarios to see what the stress test looks like in practice. Note that we’ll be assuming an annual family income of $100,000 to make the following calculations. All values were calculated using Ratehub’s mortgage calculator.

Scenario A – Using the Offered Interest Rate + 2%

In scenario A, the mortgage rate offered by the lender is 3.24%. Applying the new mortgage stress test, lenders will determine your affordability using 5.24% which is higher than the BoC rate of 4.99%. Notice that affordability drops by approximately 20%.

No Stress Test With Stress Test
Deposit 20% 20%
Term 5 years fixed 5 years fixed
Interest 3.24% 5.24%
Amortization 30 years 30 years
Affordability (approx.) $826,300 $666,200

Scenario B – Using BoC’s Five-Year Bench Mark Rate

In scenario B, the mortgage rate offered by the lender is 2.89%. Applying the new mortgage stress test, lenders will determine your affordability using the BoC rate of 4.99% which is higher than the offered interest rate + 2%. Notice that affordability drops by approximately 20%.

No Stress Test With Stress Test
Deposit 20% 20%
Term 5 years fixed 5 years fixed
Interest 2.89% 4.99%
Amortization 30 years 30 years
Affordability (approx.) $856,000 $683,600

Takeaway: The stress test reduces the mortgage loan you will qualify for.  Affordability drops by approximately 20%.

What are your thoughts about the stress test? Leave us a comment below!

Ting Chan

Ting Chan is a real estate enthusiast living in Vancouver. He strives to write easy-to-digest, relevant, and timely real estate content for everyone to understand. If you found what you read today useful, please spread the knowledge and subscribe for more!

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