The mortgage stress test is a crucial component of the Canadian homebuying process, designed to ensure borrowers can handle potential increases in interest rates.Ratehub.ca+3Rocket Mortgage Canada ULC+3Genesis Group+3
What is the Mortgage Stress Test?
Implemented by the Office of the Superintendent of Financial Institutions (OSFI), the stress test requires lenders to assess whether borrowers can afford their mortgage payments at a higher interest rate than the one they’re being offered. This is to safeguard against future rate hikes .Bank of Canada+7Genesis Group+7Scotiabank Global Site+7
How Does It Work?
Lenders use the higher of the following two rates to qualify you:iTools
- 5.25% (the Bank of Canada’s benchmark rate), or
- Your contracted mortgage rate plus 2%Genesis Group+4Scotiabank Global Site+4Rocket Mortgage Canada ULC+4Scotiabank Global Site+4Genesis Group+4True North Mortgage+4
For example, if your contracted rate is 4%, you’ll be tested at 6% (4% + 2%). This ensures you can manage payments even if rates rise .Genesis GroupTrue North Mortgage
Who Does It Apply To?
The stress test applies to:
- All new mortgage applicants (both insured and uninsured)
- Homeowners refinancing their mortgage
- Borrowers switching lenders at renewal
- Applicants for home equity lines of credit (HELOCs)Bank of Canada+1Scotiabank Global Site+1iTools+2Scotiabank Global Site+2Rocket Mortgage Canada ULC+2True North Mortgage+2Genesis Group+2Scotiabank Global Site+2
Note: As of November 2024, OSFI announced that borrowers switching to a new lender with the same loan amount and amortization period (known as a “straight switch”) are exempt from the stress test .True North Mortgage+2Scotiabank Global Site+2Genesis Group+2
Impact on Borrowing Capacity
The stress test can reduce the amount you’re eligible to borrow, as it requires you to qualify at a higher interest rate. This may necessitate a larger down payment or a more affordable home choice .Genesis Group
Why It’s Important
The stress test aims to:Loans Canada
- Protect borrowers from future financial strain due to interest rate increases
- Maintain stability in the housing market
- Encourage prudent lending practices among financial institutions
Final Thoughts
Understanding and preparing for the mortgage stress test is essential for prospective homebuyers in Canada. By ensuring you can meet the higher qualifying rate, you position yourself for a more secure and sustainable homeownership experience.