Effective June 1st, 2021, the Canadian government implemented changes to the existing stress test. Wondering how these changes may impact your home buying decisions in the future? In this blog post, we’ll go over all the important details you need to know.
What is the stress test?
The purpose of the stress test is to see if potential homebuyers could afford their existing mortgage if interest rates went up at a qualifying, or benchmark, interest rate determined by the government. The qualifying rate is typically higher than current posted mortgage rates. The Financial Consumer Agency of Canada’s (FCAC) guideline for affordability is a Gross Debt Service (GDS) ratio of 32% and Total Debt Service (TDS) Ratio of 40%.
While mortgage interest rates have been extremely low for the past few years, they could eventually rise in the future. The stress test helps homeowners and lenders determine what’s affordable in a higher rate environment.
How has it changed?
The qualifying rate has now been increased to the higher of the following:
- The rate offered by your lender + 2%; or
- 5.25% (previously 4.79%)
What does this mean for new homebuyers and existing homeowners?
The mortgage stress test applies to all borrowers looking to get a loan from a federally regulated entity, even if they’re making a down payment of 20% or more and won’t need mortgage loan insurance. For first-time homebuyers, the new qualifying rate makes it a bit more challenging to get into your first home.
For existing homeowners who already have a mortgage, you’ll also need to pass the stress test if you’re looking to do any of the following things:
- Refinance your home
- Switch to a new lender
- Take out a Home Equity Line of Credit
Calculating what you can afford
If you’re in the market for a home, you may be wondering how the change to the stress test impacts what you can afford. The Government of Canada provides a Mortgage Qualifier Tool that can help you determine what you may qualify for. Let’s compare the previous qualifying rate and the new rate.
| Previous Qualifying Rate – 4.79% | Current Qualifying Rate – 5.25% |
|
Annual Income = $100,000 Potential Property Value = $508,000 
|
Annual Income = $100,000 Potential Property Value = $485,500  |
The higher qualifying rate limits homebuyers’ buying potential which may be especially challenging in the current housing marketing with limited inventory and higher demand.
So, what can you do?
While the changes to the stress test probably aren’t the best news for home buyers, there are things they can do to pursue homeownership.
- Save more money for a larger down payment
- Pay off other debt to balance out GDS and TDS
- Increase or supplement your income
- Get a co-signer
When you’re ready to explore MCAP mortgage options, be sure to a talk to your mortgage broker. Already an MCAP homeowner? Feel free to contact us about your existing mortgage.
