What does the stress test mean for borrowers?
The stress test reduces the size of mortgage that buyers can qualify for, says Crawford. So, unless you are able to come up with a bigger down payment to make up the difference, the test also lowers your maximum purchase price.
For example, if there were no stress test at all, a borrower with an annual income of $125,000 and a minimum down payment could qualify to purchase a $750,000 home (assuming an interest rate of 2.60% and a 25-year amortization). But using the current stress test benchmark of 5.25%, the same borrower’s buying power drops to only $600,000, Crawford says. “As a result, the stress test often also impacts the type and/or location of the property that borrowers can purchase.”
With the June 2021 change to the qualifying rate, OSFI estimates that the majority of borrowers saw their mortgage loan qualification amount go down somewhere between 2% and 4%. And since renewing mortgage holders need to “pass” the stress test if they switch lenders or want to borrow extra money against their home’s equity, some may be forced to renew with their existing lender instead of shopping around, says Crawford.
The stress test at a time of rising interest rates
At the height of the pandemic, when fixed and variable rates fell into the 1% to 2% range, most borrowers faced a qualifying rate of 5.25%.
But with the recent jumps in the benchmark rate, almost everyone who has to qualify based on the stress test is qualifying at a rate higher than 5.25%, notes Matt Imhoff, a mortgage agent with Mortgages.ca. For example, obtaining a variable rate of 4.7%—equal to the prime rate at the time of this writing—now requires qualifying at 6.7%. “You’d have to subtract pretty hard [from the prime rate] to get down to 5.25%,” says Imhoff. “So my opinion is, you really need a good reason to be getting a mortgage today.”
Denise Laframboise, from LaframboiseMortgage.ca in Brooklin, Ont., adds that home buyers who were pre-approved for a mortgage before the BoC’s most recent rate hike may need to revisit the maximum they can afford to spend on a home. The mortgage broker says clients are now qualifying for mortgages that are 10% to 15% smaller than what they could have been approved for prior to the July rate increase. And even if you’ve obtained a rate hold—confirmation that your rate will not change for a specified amount of time—you might still encounter challenges getting financing.
“Typically a ‘rate hold’ is a guarantee of rate under specific conditions and terms, not a guarantee of financing. The bank has not reviewed your documents as part of the ‘rate hold’ process,” says Laframboise. “So while the rate hold might protect you from an increased qualification rate, it could also expire or not apply to the home you purchase when you negotiate a live offer. I would always stay in touch with your mortgage broker or banker to get updated numbers as changes occur, just to err on the side of caution.”
Is there any way to avoid the stress test?
No, there isn’t. Canada’s big banks are mandated to enforce these rules for all mortgage borrowers. And there’s no way to avoid the stress test if you’re getting an insured mortgage from any lender.
