The Canadian mortgage stress test has become a major policy for homebuyers in Canada. It is designed to help ensure that homebuyers can afford their mortgage payments if interest rates rise in the future. The stress test was introduced in 2018 and has since been updated several times.
The stress test assesses a borrower’s ability to make their mortgage payments if interest rates increase beyond the current benchmark rate. This benchmark rate is set at the Bank of Canada’s five-year fixed posted rate, which is currently 4.79%. The stress test works by requiring mortgage lenders to qualify borrowers at the higher of either the Bank of Canada’s five-year fixed posted rate or two percentage points above the mortgage rate they are offering. For example, if a borrower is looking to secure a mortgage with a 3.5% interest rate, they will have to qualify at the higher of either 4.79% (Bank of Canada’s five-year fixed posted rate) or 5.5% (two percentage points higher than the mortgage rate).
The stress test has been effective in helping ensure that borrowers can afford their mortgage payments if interest rates rise. It also helps to protect borrowers from taking on mortgages they cannot realistically afford. However, it has also made it more difficult for some borrowers to qualify for a mortgage. As such, it is important for borrowers to understand the stress test and how it could affect their ability to secure a mortgage.
It is also important for borrowers to understand that the stress test only applies to mortgages with a term of five years or less. Mortgages with longer terms, such as those with 10- or 15-year terms, are not subject to the stress test.
Finally, it is important to note that the stress test is not the only factor that lenders consider when assessing a borrower’s ability to afford a mortgage. Lenders will also look at a borrower’s credit score, income, debt-to-income ratio, and other factors.
Understanding the Canadian mortgage stress test is an important part of the homebuying process. By understanding how the stress test works and what it means for borrowers, homebuyers can ensure that they are taking on a mortgage that they can realistically afford.