A New Stress: What the new mortgage stress test really means
There’s a reason it’s called a mortgage stress test. And as of June 1, it’s about to get a little more stressful.
That’s when homebuyers applying for an uninsured mortgage — typically, those with at least 20 per cent down — will need to show they can withstand a contract with an interest rate of 5.25 per cent or two per cent more than their actual mortgage rate, depending which is higher. That’s up from the current qualifying rate of 4.79 per cent.
Homeowners looking to renew their mortgage, tap into the equity in their home by refinancing to take on additional debt, or expand their real estate portfolio by purchasing additional property will also need to prove they can handle can navigate rising interest rates, especially if they’re forgoing mortgage insurance.
What does the new mortgage stress test rate mean?
Put in context, the new qualifying rate of 5.25 per cent is about four times the average mortgage interest rate at the moment. It was determined based on the average five-year rate posted by Canada’s Top 5 banks.
The change is meant to insulate homeowners when the ultra-low interest rates ushered in by the economic travails of the pandemic start to return to normal, pre-pandemic levels.
It appears to be only a slight increase over the previous stress test rate at a glance. But that 46-point difference translates to a five per cent reduction in affordability or purchasing power, explained Scott Nazareth, a mortgage specialist with Mortgages.ca. “At face value, it’s something to indicate to the market that it’s being consistently monitored and these changes are a reactive approach to the rise in property values, especially in the Great Toronto Area and Vancouver area.”
How to avoid the stress of the new mortgage stress test
If the new stress test is a concern, Nazareth encourages homebuyers and homeowners with uninsured mortgages to get their financing in order now.
There is a workaround for those who aren’t yet at that point, however: Credit unions are provincially regulated, so they don’t fall under the purview of federal mortgage stress tests.
But Nazareth suggests the most foolproof hack of them all: “Don’t let the stress test stress you out,” he says. “Feel free to reach out to a mortgage professional to help navigate the rules.”