In recent years, Canada has implemented significant changes to its mortgage regulations, and one of the most impactful updates is the introduction and ongoing evolution of the mortgage stress test. This policy aims to ensure that homebuyers can afford their mortgages even if interest rates rise. However, it has also sparked many questions among buyers, especially first-time homeowners.
In this blog, we’ll break down Canada’s new mortgage stress test, explain how it works, and help you understand how these changes might impact your homebuying journey in 2024.
What is the Mortgage Stress Test?
The mortgage stress test was introduced by the Office of the Superintendent of Financial Institutions (OSFI) in 2018 to make the Canadian housing market more stable. This test requires potential borrowers to prove that they can handle their mortgage payments even if interest rates increase significantly.
The test applies to both uninsured and insured mortgages, meaning whether you have a down payment of 20% or more (uninsured) or less than 20% (insured), you will need to qualify under the stress test rules.
How Does the Stress Test Work?
The stress test calculates whether you can afford your mortgage payments based on either:
- The Bank of Canada’s qualifying rate, which is currently 5.25%, or
- Your contracted mortgage rate plus 2%, whichever is higher.
This means that even if your lender offers you a mortgage rate of, for example, 4%, you will need to qualify as if your interest rate was 6%. The goal is to ensure you can afford your mortgage in the event that interest rates rise in the future, protecting both borrowers and the housing market from potential financial instability.
What Recent Changes Have Been Made to the Mortgage Stress Test?
In 2024, the OSFI made updates to the mortgage stress test to further tighten the rules for borrowing, reflecting concerns about rising interest rates and increased household debt levels across Canada. The key changes include:
- A higher qualifying rate for many borrowers, as interest rates have increased over the past year.
- Stricter criteria for qualifying for variable-rate mortgages, which are sensitive to rate hikes.
- Updates in stress test rules for investment properties, making it tougher for real estate investors to qualify for loans.
These updates are designed to cool down an overheated real estate market, reduce risk, and prevent borrowers from taking on mortgages they may not be able to afford if rates continue to rise.
How the Stress Test Impacts Homebuyers
For many homebuyers, particularly first-time buyers, the mortgage stress test can make qualifying for a mortgage more challenging. Here are some of the key ways it might affect your homebuying journey:
1. Reduced Borrowing Power
The primary impact of the stress test is that it limits the amount of money you can borrow for your mortgage. Even if you qualify for a lower mortgage rate, the stress test uses a higher rate to assess your financial capability. This means you may be approved for a smaller loan than you were hoping for, potentially limiting your options in a competitive housing market.
2. Increased Savings Requirements
Because the stress test reduces the amount of mortgage you can qualify for, you may need to save a larger down payment or look for more affordable properties. For first-time homebuyers, this could mean delaying the purchase of a home until you have more savings.
3. Stronger Focus on Financial Health
The stress test forces buyers to take a closer look at their financial health before making a home purchase. Lenders will examine your debt-to-income ratio and overall financial stability, encouraging you to minimize debts and improve your credit score before applying for a mortgage.
4. More Competition for Affordable Homes
With stricter mortgage rules in place, buyers may shift their focus to smaller, more affordable homes that they can more easily qualify for under the stress test. This increased demand for lower-priced homes could lead to greater competition in certain markets.
How to Navigate the Mortgage Stress Test
If you’re concerned about how the mortgage stress test will affect your ability to buy a home, there are several strategies you can use to navigate the rules and improve your chances of securing a mortgage:
- Boost Your Down Payment: A larger down payment can help offset the impact of the stress test by reducing the amount you need to borrow. Consider saving longer or leveraging resources like the First-Time Home Buyer Incentive or RRSP Home Buyers’ Plan.
- Reduce Your Debt: Paying down debts before applying for a mortgage will improve your debt-to-income ratio, making it easier to qualify for a loan under the stress test.
- Work with a Mortgage Broker: A local mortgage broker like LM Mortgages can help you navigate the stress test by shopping around for lenders who offer the best rates and terms. We can also provide personalized guidance to help you improve your financial situation and increase your borrowing power.
Final Thoughts
Canada’s mortgage stress test is a key part of the homebuying process that ensures borrowers can handle potential rate increases in the future. While it may limit your borrowing power, it also protects you from taking on a mortgage that could become unaffordable over time.
At LM Mortgages, we understand that navigating these rules can be challenging, especially for first-time homebuyers. That’s why we’re here to guide you every step of the way. Contact us today to learn more about how we can help you find a mortgage solution that meets your needs while complying with Canada’s latest regulations.
Reach out to us at lindsey.meyer@teambreezeful.com or call (289) 700-3812 to get started.