Mortgage Stress Test in Canada: What You Need to Know

Does the mortgage stress test – stress you?

The mortgage stress test in Canada is a set of rules that were introduced by the federal
government in 2018 to ensure that homebuyers can afford to make their mortgage payments,
even if interest rates rise or their financial situation changes.

The stress test requires that borrowers qualify for a mortgage at a higher rate than they will actually pay, ensuring that they can still make their mortgage payments if interest rates rise.

Before the mortgage stress test was imposed in Canada, mortgage qualification was based on
the borrower's debt-to-income ratio and credit score. Lenders used to calculate how much
mortgage a borrower could afford based on their income, expenses, and other financial
obligations. Typically, lenders required that the borrower's total-debt-to-income ratio (including
mortgage payments) did not exceed 44%.

However, without the stress test, some borrowers could take on more debt than they could
realistically afford, putting them at risk of defaulting on their mortgage payments if their financial
circumstances changed.

One of the main impacts of the stress test is that it has made it more difficult for some borrowers
to qualify for a mortgage. As a result, some borrowers have had to adjust their expectations for
the type of home they can afford or the size of the mortgage they can take on. The stress test
has also had a disproportionate impact on first-time homebuyers, who may have less financial
flexibility and fewer resources to draw on.

There are some other options available to you, depending on your financial situation and needs.

Here are a few examples:

Alternative lenders “B”: These lenders operate outside of the traditional banking system and
may have more flexible lending criteria. However, interest rates are typically higher, and there
may be additional fees and charges.

Private mortgages: These lenders may be willing to lend to borrowers who do not meet the
criteria of traditional lenders, but interest rates and fees are usually much higher.
Rent-to-own: In this arrangement, the borrower rents the property for a specified period, with
the option to purchase the property at the end of the rental term.

Co-signer: Borrowers who do not meet the criteria of traditional lenders may be able to obtain a
mortgage with the help of a co-signer, such as a family member or friend. The co-signer would
be responsible for the mortgage payments if the borrower is unable to make them.

The Mortgage Stress Test applies to all federally regulated lenders in Canada, including banks,
and mortgage companies. It applies to all buyers who apply for a new mortgage, whether they
are first-time buyers or existing homeowners.

Whether or not the stress test is fair to all Canadians looking to enter the housing market is a
matter of debate. Supporters of the stress test argue that it helps to prevent borrowers from
taking on more debt than they can realistically afford, which can protect them from the risks of
defaulting on their mortgage payments. It also helps to promote responsible lending practices
among mortgage lenders, who must ensure that borrowers can realistically afford their
mortgage payments.

If you would like to know what you can afford, keeping in mind that you must qualify using the
stress test, call or email us, and will happily run the numbers in order to pre-qualify you for a
mortgage before you head shopping for your next home.

Fred and Martin