When you apply for a mortgage, the lender will offer you an interest rate based on your credit score and other financial information. But as of 2018, that rate is not what the bank uses to determine how much you qualify for.
Instead, all Canadians are required to undergo a stress test before being able to buy a home, whether it’s insured (less than 20% down) or uninsured (down payment of 20% or more). To pass the test, you have to qualify your mortgage using a minimum qualifying rate, which is greater than the rate you're being offered.
The minimum qualifying rate for this test was the higher of:
- The Bank of Canada’s 5-year benchmark rate (notional rate)
- The actual rate offered by your lender plus 2%.
What is the mortgage stress test for?
This rate is used to determine your Gross Debt Service (GDS), which measures your housing costs against your gross income, and Total Debt Service (TDS), which looks at housing costs and all other debt. Your bank is looking for a GSD of 39% or less and a TDS of 44% or less.
Passing this test shows lenders that you can continue to afford mortgage payments even if interest rates rise. With mortgage rates at historical lows, this is especially important as the rates are sure to go up in the short term and long term. But it also means borrowers may qualify for mortgages that are substantially less than they would have qualified for prior to the stress test.
If you already have a home, you could face the mortgage stress test when trying to refinance your home, switching to a new lender or applying for a line of credit. You will not have to pass the stress test if you’re renewing with the same lender.
What is the increase in mortgage stress rates?
Previously the notional rate was 4.79% but as of June 1, 2021, the rate has increased to 5.25%. That means you must qualify for a mortgage using the higher of 5.25%, or 2% more than your actual rate.
So if your bank offers you a mortgage rate of 1.78%, you would have to qualify for a mortgage at 5.25%. If your bank offers you 3.99%, you have to qualify at 5.99% (3.99 + 2).
For more information on changes to mortgage lending rules and how it will affect your financial position, contact us today. We can also discuss other homebuyer benefits, credits and tools to help you reach your goals.
