Understanding The Changes Announced To The Mortgage Stress Test Rate

The Office of the Superintendent of Financial Institutions (OSFI) announced last week that it intends to raise the “Stress Test” rate to 5.25%, or 2% above the contract rate (whichever is higher) on uninsured mortgages, and is currently seeking submissions from stakeholders ahead of implementing these new rules on June 1^st.

The “Stress Test” was first introduced in 2018 at a level of 4.79 and was based on the current average five-year posted rate at Canada’s biggest lenders, as per the B-20 Guidelines.

The stress test is the rate used when qualifying for a mortgage regardless of what the actual rate is. This higher rate creates a higher payment which is used in calculating Debt Service Ratios. Debt Service Ratios need to be in line at 39% Gross Debt Service and 44% Total Debt Service.

The stress test theoretically reduces home buying or borrowing power. This latest increase resulting in about a 4% reduction. Keep in mind this new stress test rate is for “uninsured” mortgages, or mortgages with more than 20% down payment. Insured mortgages with less than 20% down will continue (at least for now) at the current benchmark rate of 4.79.

Let’s look at what that means for uninsured buyers ….

Family combined income of $100,000 and for simplicity we will assume no other debts or monthly payment obligations (no car loans, no credit cards, no student debts).

Uninsured mortgage with 20% or more down payment qualified at current benchmark of 4.79 on a 25 year amortization would qualify for about a $465,000 mortgage. At the new stress test of 5.25 that same borrower’s qualified mortgage amount would be reduced to about $444,000.

Some things to keep in mind

• Uninsured mortgages can have a 30 year amortization which would increase the mortgage amount available.
• Mortgage brokers also have access to non-federally regulated lenders – like credit unions who can still qualify at contract rate. This option may come at a cost with a slightly higher interest rate.
• Not all conventional borrowers are right at the threshold maximum of 80% loan to value. Access to additional down payment available could impact purchase amounts.

While these changes will impact some borrowers reducing the amount they can borrow, Insured Borrowers, or those with with less than 20% down, remain unchanged.

We expect, as happened in the past, that mortgage approvals with accepted purchase and sale agreements prior to the date of the new policy coming into place and closing dates after the change date, will continue to qualify at the current rate.

Curious how much you qualify for?

Let one of our experienced Mortgage Agents run your numbers and guide you through your next mortgage.