What You Need to Know About the Canadian Mortgage Stress Test in 2022

This article was updated on February 22, 2022

So you’re looking to buy a house. For many prospective homebuyers, navigating the real estate market and financial obligations, which come with buying a house, can be daunting.

Challenges can arise  when it comes to the process of meeting the requirements for and getting approval for a mortgage. Unfortunately, with new changes to curb a heated housing market in 2022 and legislation surrounding mortgage rules, what was already a complex process, is even more stressful. 

What is the Canadian Mortgage Stress Test?

In 2017, the federal government implied new mortgage rules outlining that all Canadian buyers applying for a mortgage from a federally regulated lender were now required to undergo the OSFI Mortgage Stress Test. It used to be that anyone who put less than 20% down on a home was required to undergo the mortgage stress test. Now, everyone buying a home is subject to the requirement, even those who put down over 20%. This is also the benchmark that remains in place for uninsured borrowers.

The OSFI Mortgage Stress Test works to test how you and your finances might be affected by a sudden bout of financial turmoil, such as a loss of employment. As a potential homeowner, this simulation hypothetically demonstrates how you would cope with your mortgage payments if your interest rate rises or you suffer a financial emergency.

Passing the Stress Test in 2022

With rising home prices that have increased by almost 20% over the previous year, housing affordability has become a concern. This makes the 20% down-payment threshold an important factor for insured mortgages and it makes the OSFI Mortgage Stress Test a critical component of determining affordability on an individual basis. 

In passing the OSFI Mortgage Stress Test, prospective homeowners prove they can afford their potential mortgages based on their lender’s minimum “qualifying rate.” 

Before June 1st, 2021, any buyer whose down payment was 20% of the purchase price or more was required to show they could afford mortgage payments if the interest rate was 2% higher than what the bank was offering them, or the minimum qualifying rate of 4.79%, whichever was higher. These added percentages act as the benchmark rate or “floor” used to qualify uninsured mortgages.

However, over 90% of new mortgage borrowers are now stress-tested at the greater of the contracted mortgage interest rate plus 2% or a set rate of 5.25%, which is well above the current posted mortgage rates. This ensures that homeowners can maintain their mortgage debt by the time interest rates increase and mortgage renewals arise.

As mortgage interest rates rise, as they are sure to over the coming year, and the average formulated rate rises above 5.25%, so too will the qualifying rate for new mortgage borrowers and those that are renewing.

Who Does the Stress Test Impact?

To tackle the household debt issue in Canada and curb an overheated housing market, the Canadian government implemented new qualifying regulations on mortgage approvals. This new testing system was designed to prevent consumers and eager homebuyers from taking on a mortgage and more debt before they truly were financially stable to do so.

So, the stress test affects Canadian homebuyers applying for or renewing a mortgage. However, for first-time homebuyers and insured borrowers, these new regulations have disproportionate impacts.

With already lower buying power, these novice homebuyers will have a tougher time getting their foot into the door of an already challenging housing market, especially in population-dense provinces like Ontario.

As well, the mortgage stress test will be applied to anyone changing mortgage lenders as though the borrower was a new buyer. The stress test is also used for anyone with an existing mortgage or who owns a home outright that wishes to take on a HELOC (Home Equity Line of Credit).

How to Reduce The Impact of a Mortgage Stress Test

The Canadian government has mandated that the banks impose the OSFI Mortgage Stress Test on their new and renewing mortgage clients. However, the mandate does not apply to provincially regulated credit unions and alternative lenders.

This can allow potential homebuyers to step into the real estate market with faster mortgage approvals even if they have low credit scores or high debt-to-income ratios. However, a homebuyer may have to endure higher interest rates, additional fees, and smaller loan limits, making the stress test rate irrelevant. 

Taking this route does require a measure of caution because as interest rates rise, it may become a burden to maintain the monthly mortgage payments upon renewal due to over-leveraging. So you can avoid a mortgage stress test, but over the medium-term, would you want to? That’s something you will need to determine before you take the plunge into a home purchase.

Other considerations include a 30-year amortization, which can lower your monthly mortgage payments, although it extends the time during which you will be paying for your home. You can also benefit from a gifted down payment to help you make the purchase and achieve the 20% threshold, although there are certain restrictions for this depending on the lender. Usually, the gifted down payment must come from an immediate family member, so it can’t be just anyone. Your lender will likely ask for a mortgage gift letter to show proof of your relationship with the person gifting the money and where the money came from. As well, a co-borrower can help you reach the 20% threshold. This must be someone who is of legal age, has a steady income, and a solid credit history. It is common to have a parent as a co-borrower on a mortgage.

Navigating A Changing Canadian Housing Market

Buying a home can be overwhelming. With an elevated OSFI Mortgage Stress Test, this sentiment only amplifies. However, homebuyers are not alone.

With the right real estate team guiding you through the intricate requirements of buying a house, getting the keys to your dream home doesn’t have to be such an intimidating process. The real estate professional you choose should be able to share their resources to find you not only the best home for your family but to also lead you in the direction of a solid lender so that you can get the best mortgage rate and terms that meet your needs. 

This is especially important in today’s incredibly hot Canadian real estate market as home inventories have dwindled. Add to that the fact that we are staring at a central bank that is poised to begin a cycle of rising interest rates which may further price out new homebuyers.

The Team to Guide You Through Stressful Real-Estate Experiences

Expect more from your real estate team. At Amy Flowers, we are experts in the changing conditions of the Ontario housing market serving the vibrant Milton area.

Whether you are a first-time homebuyer or have a couple of properties under your belt, we have the resources and expertise dedicated to helping you navigate the housing market and taking the stress out of the new OSFI Mortgage Stress Test.

Get in touch with the Amy Flowers team today.