Stress Testing Your Mortgage

The Mortgage Stress Test Defined

In early October of this year, the Bank of Canada announced new changes to its mortgage financing rules. These new rules come in the form of a stress test. The stress test acts as a front-line assessment for lenders to determine borrowers’ mortgage affordability at the BoC rate of 4.64% on a standard 5-year fixed-rate. Doing this ensures that borrowers can still afford their loans at sudden or future interest rate hike.

Who the mortgage stress test affects

The mortgage stress test affects home buyers who offer down payments worth less than 20% of their total mortgage amount. This means that if you require CMHC insurance, you’re automatically “tested” on your mortgage eligibility and ability to pay at the federal rate.

What the mortgage stress test involves

First-Time Buyers

As a first-time buyer, from October 17th onward, your lender calculates your affordability at 4.64%. This calculation factors in your down payment at various percentage levels related to a pre-approved or set-in-stone mortgage amount. Your lender figures out your maximum monthly mortgage, relates that to the BoC rate, and works from there.

Generally speaking, the less you put down, the greater your monthly payments will be. This leaves you at-risk for losing buying power on your down payment savings or even a denied application.

If you offer 20% or more, then the rules don’t apply to you altogether.

Refinancing

Refinancing (or renewing) your mortgage means that you’ll be allowed to refinance up to 80% of your home’s value (rather than the current 85%). Starting from November 30th, refinancing a CMHC-insured home is no longer allowed.

Actions to Take

  • If you can afford to add an extra 3–5% to your down payment value, doing so can increase your affordability and save you thousands in interest payments.
  • If you currently own a home, ask your lender to perform a stress test on your current mortgage. This can help if and when you decide to refinance or buy a newer home.
  • If you were pre-approved for a mortgage and didn’t buy your home before the rules changed, your pre-approval value likely decreased/mortgage has to be reassessed. Contact your lender to see if this is the case.
  • If you’re renting and are looking to buy a home soon, try to cut back on non-essential expenses and add any excess funds to your down payment savings.

Ultimately, Canadian consumers are careful spenders and seek to maximize their hard-earned dollars. While the new rules may seem like a roadblock to homeownership, knowing them can help you leverage savings towards a new home.