The mortgage stress test was designed to ensure that Canadians are able to make their mortgage payments, even if the rate was to increase in the future; humble foreshadowing from the Bank of Canada.
how does stress test work?
Here is how it works, when you qualify for a mortgage you will be qualified at your contracted mortgage interest rate plus 2% or the Bank of Canada’s current five-year benchmark rate, whichever of the two is greater.
For example, if you are applying for a mortgage at a rate of 3.49%, then your lender will assess you as if you were paying your home loan at 5.49% (3.49% + 2.00%).
why does the stress test exist?
Essentially, in Canada there is a household debt issue that continues to arise. The stress test was designed to prevent consumers from taking on more debt. As of today, the average household in Canada is indebted at 137% of their disposable income, which basically means that Canadians owe $1.37 for every dollar they earn after taxes.
Originally, the mortgage stress test was only applicable to Canadians who were applying for high-ratio mortgages (mortgages with less than a 20% down payment). But as of October 2017, all mortgage applicants are required to undergo this stress test.
Are you considering a move in the future? Contact our team today to discuss how you can best prepare for your mortgage stress test.