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New changes are coming soon for Canada's mortgage stress test, which could make it more difficult for homebuyers to get mortgage approval as of June 1, 2021. The mortgage stress test was first introduced in 2017 to help prevent Canadians from getting into situations where mortgage rate increases would make it difficult or impossible to afford their mortgage. In a nutshell, the stress test calculates the amount of money you can borrow today and still be able to afford the payments if the interest rate were to increase in the future. 

While there have been a few iterations, the current interest rate used in the stress test is the higher of a benchmark rate or the contracted rate plus 2 percent. The new rules will have implications for first-time homebuyers, repeat buyers and those looking to refinance. 

Less Buying Power

The current benchmark rate for the mortgage stress test is 4.79% and will increase to 5.25% as of June 1. This means that homebuyers will qualify for lower mortgage amounts, limiting their buying power as average home prices soar across the country. 

For example, here's what it looks like for a family with a $100,000 annual income and a 20% down payment. At the rate of 4.79% used to calculate the stress test and a 5-year fixed mortgage rate of 1.78% amortized over 30 years, the family would qualify for a home valued at $651,000. After June 1, the stress test rate rises to 5.25%, reducing the qualifying amount to $618,000. In the hot Canadian housing market, that's a big change in buying power. 

Looking Ahead to Post-Pandemic Economy 

The hot real estate market is one of the reasons for the upcoming changes, along with other criteria such as higher credit scores and a reduction in the gross debt ratio. We have enjoyed very low mortgage interest rates since they were chopped at the beginning of the pandemic. However, as we look ahead to further economic recovery, interest rates are certain to begin rising. The higher stress test can cause a cooling down of the housing market while also protecting prospective buyers from overextending.   

What Determines the Benchmark Rate?

The stress test mortgage rate is the average rate of actual mortgage contracts over the last 12 months. The Office of the Superintendent of Financial Institutions (OSFI), which is responsible for setting the benchmark rate, has indicated that the benchmark rate would be revisited at least once a year to ensure that it reflects current economic conditions. 

Not All Mortgages

It may be good news for potential homebuyers that not all mortgages are subject to the mortgage stress test. If you are looking to refinance or buy a new home again or for the first time, you should know your options. The Big Six banks are required to apply the mortgage stress test to all new mortgage applications. However, credit unions and other lenders do not fall under the regulations. These lenders may be more willing to accept applications without strict adherence to the stress test. Mortgage renewals (which do not require a new mortgage application) are not subject to the stress test. 

So, even if your financial circumstances have changed since your initial approval, and it's time to renew, there's no need to worry. 

Understanding mortgage qualification rules and the mortgage stress test can be confusing. If you are thinking about buying or refinancing, contact a professional mortgage broker to help you make sense of it all. In Niagara Falls, Dave Destefano and the Mortgage Group are ready to help with advice and help finding the best mortgage to fit your financial goals.