Mortgage Stress Test: Will it be harder to quality?

Earlier in the spring, some of the top banking regulators in Canada had proposed raising the mortgage stress test level which will make it harder for hopeful homebuyers to qualify for a mortgage.

The Office of the Superintendent of Financial Institutions (OSFI) has confirmed that it will be applying those tighter rules, effective June 1, 2021.

The new qualifying rate for an uninsured mortgage – where borrowers have at least a 20 per cent down payment – will rise to either the mortgage contract rate plus 200 basis points or 5.25 per cent, whichever is higher.

That’s compared to the previous average mortgage stress test rate which was 4.79 per cent at Canada's biggest lenders. Would-be buyers wishing to borrow money to purchase a home now need to prove that they can pay the loan at a higher interest rate – regardless of the rate they actually get with their mortgage.

The difference in rates may seem small on paper but it can add up on practice – in some cases, reducing how much a household can borrow by more than $100,000.

Let’s say, for example, a homeowner currently has a 25-year mortgage of $300,000 at two per cent (the rate they may actually get from the bank) – their monthly payment is $1,270 a month.

At 4.79 per cent (where the big bank posted rates already are), that same monthly payment jumps up to $1,709. At 5.25 per cent (the new proposed stress test rate), the monthly payment would jump to $1,788 a month. So, the difference between what someone may be paying monthly versus what they need to qualify for with the stress test is significant – more than $500 a month.

If the borrower can’t prove that they could financially withstand the rate hike, the bank can’t lend them the money.

The first iteration of the stress test was introduced in early 2018 as a way to “cool down” the housing market by making it harder to qualify for a home loan and thus shrinking the pool of qualified borrowers.

The current proposal for a higher stress test is not completely unexpected. There had been talk of the Office of the Superintendent of Financial Institutions (OSFI) raising the rate before COVID-19 but the pandemic paused those plans.

The qualifying rate will be reviewed at least once a year, in December. The OSFI says that timing allows regulators to adjust the regulatory conditions ahead of the busy spring selling season.