27 Mar, 2024
mortgage stress test
First Time Home Buyer,Mortgages Comments Off on Understanding the Effects of Canada’s Mortgage Stress Test on Borrowers

Mortgage Stress Test

Impact of Canada's Mortgage Stress Test on Borrowers

Have you ever wondered how Canada’s mortgage stress test impacts borrowers? Implemented in recent years, this test has significantly influenced the mortgage landscape, impacting how much Canadians can borrow for their homes. Let’s dive into the details to understand its implications for borrowers and the real estate market.

The Purpose of the Mortgage Stress Test

Introduced by the Office of the Superintendent of Financial Institutions (OSFI) in 2018, the mortgage stress test aims to ensure that borrowers can afford their mortgages even if interest rates rise or their financial situation changes. It requires borrowers to qualify for a mortgage at a higher rate than the one they will actually pay, typically the Bank of Canada’s five-year benchmark rate or their contracted rate plus 2%, whichever is higher. 

What is a Mortgage Stress Test?

A mortgage stress test’s primary objective is to make sure that borrowers can continue to make their mortgage payments if interest rates rise. You must pass a stress test to be eligible for a mortgage from any federally regulated lender.

When refinancing your mortgage, applying for a new mortgage, or moving lenders (if the mortgage is uninsured), you have to pass the stress test. If, on the other hand, you choose to transfer your default-insured mortgage to a different lender at maturity or renew early with the same lender, you won’t have to pass the stress test.

Qualifying rate: The higher of 5.25% or your mortgage rate + 2%, whichever is higher

The purpose of the stress test is to prevent borrowers from taking on excessive debt when they apply for a mortgage, which might put pressure on their finances if interest rates rise in the future. Because you must demonstrate that you can continue to make mortgage payments even if interest rates rise, the test lowers your borrowing ability and may even disqualify you. 


Impact on Borrowers

The stress test has had a significant impact on borrowers, especially first-time buyers and those with variable income or high debt levels. Here’s how:

Reduced Borrowing Capacity

The stress test has reduced the borrowing capacity of many Canadians, as they now qualify for smaller mortgages than before. This has made it challenging for some to afford homes in expensive markets like Toronto and Vancouver.

Affordability Challenges

With reduced borrowing capacity, some borrowers are finding it harder to afford homes in their desired locations. This has led to a slowdown in the real estate market in some areas, as buyers struggle to find affordable housing options. At Cashin Mortgages, we have witnessed firsthand the frustration and disappointment experienced by clients who are unable to meet the stringent criteria imposed by the stress test.

Increased Demand for Alternative Lenders

Some borrowers who no longer qualify for traditional mortgages are turning to alternative lenders, such as private lenders or credit unions. While these lenders may offer more flexible borrowing options, they often come with higher interest rates.

Impact on the Real Estate Market

The stress test has had a cooling effect on the real estate market in some regions, such as Toronto and Vancouver, the policy has contributed to a slowdown in sales activity and tempered price growth as fewer buyers can afford to enter the market. This has led to slower price growth in some areas, making it a more balanced market for buyers and sellers.


Adapting to the New Landscape

Despite its challenges, the mortgage stress test has compelled both borrowers and lenders to adopt a more cautious approach to mortgage financing. At Cashin Mortgages, we recognize the importance of helping our clients navigate this new landscape effectively. By providing personalized advice and tailored solutions, we empower borrowers to make informed decisions that align with their financial goals and circumstances. Whether it involves exploring alternative financing options, adjusting budgetary expectations, or optimizing credit profiles, our team is committed to supporting borrowers every step of the way.

Mitigating the Impact

While the mortgage stress test has made it more challenging for some borrowers to qualify for mortgages, there are ways to mitigate its impact:

Improve Credit Score

A higher credit score can improve your chances of qualifying for a mortgage and help you secure a better interest rate.

Reduce Debt

Paying down existing debt can improve your debt-to-income ratio, making you a more attractive borrower to lenders.

Increase Down Payment

A larger down payment can help offset the impact of the stress test, as you’ll need to borrow less money.

Explore Alternative Lenders

If you’re unable to qualify for a mortgage with a traditional lender, consider exploring options with alternative lenders. They may have more flexible borrowing requirements.


Final Thoughts

Canada’s mortgage stress test has had a significant impact on borrowers, especially those with high debt levels or variable income. While it has made it more challenging for some Canadians to qualify for mortgages, it has also helped to stabilize the real estate market and ensure borrowers can afford their homes in the long run. By understanding the implications of the stress test and exploring alternative lending options, borrowers can navigate the changing mortgage landscape and achieve their homeownership goals. 

As a trusted partner in the mortgage industry, Cashin Mortgages remains committed to empowering borrowers to navigate these challenges effectively. By staying abreast of regulatory developments, market trends, and evolving borrower needs, we strive to provide innovative solutions and exceptional service to our clients. Contact us for more information.