Navigating the mortgage market can be challenging, especially with various rules designed to protect both borrowers and the broader economy. One such rule is the mortgage stress test, introduced by the Office of the Superintendent of Financial Institutions (OSFI) to ensure that borrowers can manage their mortgage payments even if interest rates rise in the future.
What Is the Mortgage Stress Test?
The mortgage stress test ensures that homebuyers can handle their mortgage payments even if they need to renew at higher rates than the ones they lock in today. Simply put, when you apply for a mortgage, your lender will qualify you based on the higher of two rates:
- The benchmark rate set by OSFI, currently 5.25% (subject to periodic review).
- Your contract rate (the actual rate offered by the lender) plus 2.00%.
How It Works in Practice:
If you’re offered an interest rate of 2.00% (though unlikely in today’s market), your lender will still assess your financial capacity using the 5.25% benchmark rate, to ensure you can handle potential rate increases. On the other hand, if you’re offered a rate of 5.00%, you would need to qualify as if you were paying a rate of 7.00% (your 5.00% rate + 2%).
This system is designed to safeguard borrowers by making sure they don’t overextend themselves and can afford their mortgage payments if rates rise.
Who Does the Stress Test Affect?
The stress test applies primarily to prime and most alternative mortgage applications, whether you’re purchasing a new home or refinancing an existing mortgage. It also applies to uninsured (conventional) mortgage transfers when switching lenders.
However, starting November 21, 2024, you’ll be able to transfer your mortgage from one lender to another without having to qualify under the stress test, making it easier for homeowners to shop around for better rates without the added qualification burden.
Why the Stress Test Matters
The stress test is a critical tool for maintaining the stability of Canada’s housing market. It helps reduce the risk of borrowers over-leveraging themselves and defaulting on their loans, especially in times of rising interest rates. By ensuring homeowners can handle fluctuating rates, the stress test contributes to a healthier, more resilient financial system.
Whether you’re a first-time buyer or refinancing your existing mortgage, understanding the stress test and how it affects your qualification process is crucial in planning your homeownership journey.
