The mortgage stress test, also known as the B-20 Guideline, was implemented by the Office of the Superintendent of Financial Institutions, or OSFI, in January 2018. It was designed to help buyers by ensuring they can afford mortgage rate changes that may occur over the term of their mortgage.
Ok, so what does this mean for you? Let’s break it down.
What is the stress test?
Originally, the terms set forth of the stress test required borrowers to prove they could manage a mortgage at an interest rate that was either 2% higher than the rate offered by their lender or equal to the five-year benchmark rate published by the Bank of Canada — whichever rate was higher.
What is different as of June 1, 2021?
The stress test rate will increase on June 1 from 4.79% to 5.25%.
The stress test will also be applied to uninsured mortgages and to borrowers seeking insured mortgages because of lower interest rates.
This means that mortgage applicants making down payments of at least 20%, and therefore not required to pay mortgage insurance, must also prove they can afford an interest rate of 5.25% for their loans to be approved. That’s regardless of the mortgage rate their lender offers them.
Does this mean the amount I qualify for will be less?
This change doesn’t increase your actual costs, but it will impact the amount you can borrow.
For example:
If you were preapproved to buy a home for $500,000 with a 20% down payment before the stress test changes, you might only be qualified to buy a $480,000 home after they’re implemented. This means you would need to save up an additional $20,000 to make up the difference.
Why did the government implement the stress test, and why raise the rate now?
The stress test was designed to help cool the rising cost of housing across Canada. And this rate increase impacting all homebuyers comes at a time where we see unprecedented bidding wars, significant house price increases and some of our lowest interest rates.
While the immediate feeling that the stress test is impacting your buying power, because it is, it is meant as a safety measure to ensure if rates increase, you have peace of mind that you can continue to afford your mortgage.
Think of it this way:
• If a person stretches themself financially to afford a home, it leaves them little room in their budgets for higher mortgage costs.
• If mortgage rates were to increase significantly over the course of that homeowner’s mortgage term, it could potentially make it much more difficult, if not impossible, for that borrower to make payments.
So, by baking a theoretical mortgage rate increase into the mortgage rates, OSFI’s intent is to ensure that anyone buying a home will be able to absorb the cost of a mortgage that becomes more expensive.
I have a purchase agreement in place. Will these changes impact me?
If you have a signed purchase agreement in place before June 1, 2021, you will not be impacted by the stress test rate increase from 4.79% to 5.25%.
My mortgage is up for renewal; how will I be impacted?
If you are offered a renewal from your existing lender, you have been approved based on your history with that lender, and there is no need to qualify if you choose to remain with them.
However, if you are looking for a more competitive option and want to move to another lender, you will need to qualify using the higher stress-test rate.
The best thing to do if you have questions about your mortgage and how the changes to the stress test may impact you, give our team a call. We are always here to help.
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