It’s Now Easier to Pass the Mortgage Stress Test


Home buyers will now have an easier time qualifying to purchase a home, thanks to a recent rate change by the Bank of Canada. 

The central bank announced a decrease to its qualifying mortgage rate, dropping it from 5.34% to 5.19%. So, what does this mean for home buyers? Well, it lowers the minimum mortgage amount Canadians need to qualify for. Let us explain.

What Is the Mortgage Stress Test?

In early 2018, the Office of the Superintendent of Financial Institutions (OSFI) implemented a mortgage stress test that requires home buyers to qualify at a mortgage rate that is the higher of the Bank of Canada’s benchmark rate or two additional percentage points to their contract rate. 

The stress test was put in place to ensure Canadians don’t take on any mortgage debt that they couldn’t be able to pay off, in the event of future rate increases. It essentially forced home buyers to purchase more affordable houses than they could have previously qualified for. 

In real terms, this means that a home buyer who gets a five-year fixed-rate mortgage of 2.54% (currently the best mortgage rate in Ontario) would have to prove to their lender that they could qualify for the Bank of Canada’s benchmark rate. 

An Increase in Home Buying Affordability

Since the Bank of Canada recently lowered its benchmark rate from 5.34% to 5.19%, Canadians are now forced to qualify at a lower rate and, thus, can afford pricier homes than they could have prior to the rate decrease.

And it’s first-time homebuyers, the buying cohort that faces the biggest challenges when trying to purchase a home, who will likely benefit the most, according to James Laird, president of CanWise Financial.

“The change in the Bank of Canada five-year benchmark rate now means that Canadians can qualify for more home today compared to earlier this year and 2018,” Laird said. “The decreased stress test rate alleviates some of the pressure on first-time home buyers, who are the most financially strained Canadians entering the housing market.”

According to calculations, a home buyer with an annual household income of $100,000 with a 20% down payment and a five-year fixed mortgage of 2.70% amortized over 25 years would have qualified for a home valued at $589,000 at the former benchmark rate of 5.34%.

However, with the new qualifying rate set at 5.19%, they can now afford a home valued at $597,000That’sadifference of $8,000 (1.4% pricier home).

Talk to a Pro About Your Mortgage Options

If you’re thinking about buying a home, it can be confusing trying to figure out what you can qualify for. First, check for the best mortgage rates in Canada and speak to a mortgage broker. You can also check our Canada mortgage calculator to help you figure out what your monthly mortgage expenses might be. 

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