On June 1, a tougher mortgage qualifying rate came into effect in Canada, this qualifying rate, also known as the “benchmark” or “stress test” affected homebuyers’ purchasing power by reducing the amount of mortgage they can qualify for.
A mortgage stress test is a way of determining exactly how much a home buyer can afford (and under what circumstances). If their income was reduced or they lost their job, could they still afford to make the mortgage payments? What if interest rates were to spike or they needed to refinance their home?
While some believe the government’s choice to stiffen the stress test is to help cool hot markets it is more likely a foreshadowing of mortgage rate (contract rate) increases in the near future.
This type of check and balance planning is important. Interest rates fluctuate, as do home prices. A homebuyer knowing they can still afford to pay their mortgage if interest rates increase is important, and could affect the kind of home they decide to buy.
Since 2018, all Canadian home buyers getting a high-ratio (putting less than 20% downpayment) mortgage have been subject to a mortgage stress test, the test now applies to all mortgages (high-ratio or otherwise). The mortgage stress test requires banks to check that a borrower can still make their payment at a rate that’s higher than they pay.
When a home buyer applies for a mortgage, they will be offered a contract rate (the rate your mortgage payments will be calculated on) however they will need to qualify at the qualifying rate which is higher than their contract rate.
On June 1, the qualifying rate increased from 4.79 percent to 5.25 percent (or 2% higher than your contract rate, whichever is higher) and all mortgages high-ratio or otherwise must now use these new stress test numbers.
A tougher stress test means potential buyers with a higher debt to income ratio won’t be allowed to borrow as much, ultimately helping to protect the market if interest rates increase.
OSFI – Canada’s financial regulator – said it will review the minimum qualifying rate on an annual basis.
Ultimately for home sellers, this could lead to fewer buyers, if the stress test decreases the amount homebuyers can mortgage and therefore afford the market could see fewer homebuyers.
As a home buyer, they must check with their bank or mortgage broker to see how the new stress test will affect their ability to purchase a property. If a homebuyer can no longer qualify for the payments they were previously approved for they may need to weigh their options, save a larger down payment and defer the purchase or choose a more affordable home.
The June 1 change to the qualifying rate means on average home buyers will lose 4% - 5% of their purchasing power (the amount they can afford to purchase).