Canadian Mortgage Rules & Stress Test: What you Should know

Enjoy this post sponsored by Streetwise Mortgages.

New mortgage rules are coming in on June 1, 2021 with revised stress test to check on affordability.

The change will apply to all mortgages, regardless of how much you are putting down.

To remind you of what the stress test is:

It is a methodology implemented by the Office of the Superintendent of Financial Institutions ( OSFI ) , which is the regulator body that governs the banks and is a tool for market intervention designed to manage a heated real estate market.

The stress essentially says the following :

Every time you are applying for a mortgage, whether you are buying or refinancing:

the banks will factor a higher payment than what your actual mortgage payment will be for the purpose of mortgage approvals.

Let’s look at an example:

  • You purchase a 550,000 property and you are putting 20% down. Therefore you would be applying for a mortgage in the amount of $440,000 .

  • If the lender is offering you a 5 years variable rate at 1.5% at a 30 year amortization : your actual mortgage payment would be $1,517.

  • BUT, in order for the bank to approve your mortgage though , they have to confirm that you are able to afford the higher of 2 payments -->1.5%+ 2% ( that is $1,969 ) or a payment at the new bank of Canada qualification rate of 5.25% ; which is $2414.

Bottom line--> the bank is ensuring that you can afford a much higher payment in case interest rates go up in the future ( in a nutshell : the higher of the rate you are being approved for + 2% or a new benchmark rate of 5.25% ; which is up from the current 4.79%)

OSFI has also indicated that they will review this qualification criteria for adjustments on an annual basis.

How Does this Change Impact Your Purchasing Power or Ability to take Equity out?

If you recall: the first stress test was implemented in Canada back in 2018.

At the time purchase power declined by about 22% in 2018 vs 4-4.5% now in 2021.

There is no doubt, this new stress test also impacts purchase power but the impact is much smaller. More in the range of 4-4.5% drop in purchase power.

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