With all the talk about the Bank of Canada’s recent and urgent interest rate hikes, Canada’s real estate market continues to be a hot topic. Amidst all this discussion—and especially if you’re considering buying a home—you may have heard the term “stress test” floating around. Wondering what kind of test this is exactly and why people are talking about it? Read on.
What is a “stress test”?
The “stress test” applies to qualifying for a mortgage. It was introduced in 2016 and its rules were updated in June of 2021, when interest rates in Canada were at a historic low. The stress test is used by banks to determine if home buyers would be able to continue to afford their mortgage payments if interest rates increase. This means that banks have to approve buyers at a higher qualifying rate.
Why was it created?
The Canadian government introduced more stringent stress test rules last summer in an attempt to combat the ultra competitive housing market. It’s a measure meant to protect home buyers from overextending their debt, by helping to make sure that they’re able to handle mortgage payments at higher rates when they rise—which is what we’re seeing now with a 2.5% interest rate imposed by the Bank of Canada this month.
Who has to take the test?
The mortgage stress test impacts all Canadian home buyers applying for or renewing a mortgage, both uninsured (meaning you have a down payment of at least 20%) and insured (if you’re buying a home and have a down payment of less than 20%, and the purchase price is under $1 million).
What is the qualifying rate?
The current mortgage stress test rate is determined by whichever of the following is greater:
- The rate you qualify for plus 2%; or
- The stress test rate of 5.25%
Will the stress test rate change?
While only time will tell, now that the market appears to be cooling, there has been some talk that regulators may revisit stress test rules.
Can the stress test be avoided?
All major banks in Canada have to use the stress test—however credit unions, which are not federally regulated and provide uninsured mortgages, do not. But note that even if you’re not subject to the stress test, you could still see higher rates with this type of lender.