What is a Canadian Mortgage Stress Test?

Samantha Tai MacLeodBlog

What is a mortgage stress test?

It’s about what could go wrong

Testing for how much stress a borrower can withstand is crucial for determining their overall financial stability. It aids lenders determine whether or not a homeowner can afford to repay their mortgage payments with possible future rate increases. Everyday we deal with variability and risk. Whether or not you are risk averse, preparing for the worst is never dissuaded. Especially when it comes to your financial investments. After all, what greater financial investment can you make other than owning your own property?

When it comes to mortgages, a stress test is a hypothetical “worst-case” scenario which shows you exactly how much room for error you can afford, and under what circumstances. You don’t need to be a pessimist to admit that not everything goes exactly as planned sometimes. Which is why it is important to assess your financial flexibility of overcoming unexpected economic shifts when applying for a mortgage.

Why do we use the Stress Test?

The “Stress Test’ is a government required calculation which uses the Bank of Canada Posted Rate (currently 4.79%) when determining your maximum mortgage amount. Stress tests are important for external factors as well; such as interest rate fluctuations and residential market price trends.

Since 2018, the stress-test procedure has varied. Originally being for all insured and high-ratio mortgages, it is now become standard practice for all mortgage applications to be subject to the stress-test. A high-ratio mortgage constitutes any mortgage where the downpayment is less than 20% of the property value. Whether you’re applying for a conventional or a joint mortgage, you will be tested to determine whether or not you can continue to make your scheduled payments at a rate that is higher than the actual rate you will be paying.

How is the Stress Test determined?

The stress test is determined by the Bank of Canada’s qualifying rate. Which is based on the average of the 5-year fixed rates from Canada’s network of big banks. In practice, the qualifying rate is used by lenders to calculate your debt-service ratios. The current qualifying rate is 4.79%.

“This means that your income needs to be high enough, and your existing debt low enough, to be able to pay down your mortgage at that higher rate. Generally this will result in you being able to borrow a smaller amount of money.”

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If the qualifying rate increases, you will be tested to see if you can maintain payments at that higher rate. Despite the actual rate that you secure for your variable or fixed rate mortgage. Stress tests ultimately help determine how much you can actually borrow for your mortgage. Additionally, they are a good indicator to current market trends.

It is important to stay up to date on changes to the Canadian qualifying rate as it can directly affect your financial ability to qualify for the mortgage you want. Consulting a mortgage professional not only allows you to properly assess your current and ideal debt-service ratios, but can also help keep you in the loop to ensure that you are securing the best rate for you based on your current situation.

Contact us today

We hope that this article was helpful in getting a brief overview of our current economic situation. And in turn, how it can and will affect your mortgage rates. Again, the best solution is to contact a mortgage professional, and where better to look than the mortgage professionals themselves.

Give us a call today, or email us at info@themortgageprofessionals.ca

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