The Mortgage Stress Test Here to Stay?

While nothing has really changed with the Stress Test in the last couple of years, there have been a few rumours about potentially changing the test. What could this rule change mean for homeowners and homebuyers in the next few years? First, let’s get into what this rule change could look like.

What is the Mortgage Stress Test?

The Mortgage Stress Test requires lenders to assess whether borrowers (you) can afford their mortgage payments at a higher interest rate than the one they are applying for. Lenders use the greater of:

• The mortgage contract rate plus 2%, or

• 5.25% (the current “floor” for uninsured mortgages) 

This means that even if you secure a mortgage rate of 4.5%, your lender has to ensure you could still afford payments if your rate jumped to 6.5%. This 6.5% is the Minimum Qualifying Rate (MQR).

Proposed Changes

The key player you need to know here is the Office of the Superintendent of Financial Institutions (OSFI). This agency is the primary regulator of federally regulated financial institutions. As their core, they look to mitigate risks to Canada’s financial system.

They had a few reasons to implement the stress test in 2018 (2016 if we’re getting technical), but the three main reasons were:

• Concerns over increased mortgage and overall household debt,

• Rising home prices,

• Ensuring borrowers could still pay their mortgage in a fluctuating interest rate environment

While we want to ignore pandemic times, we have to look back at what happened to rates and homebuyers. Many homebuyers were able to qualify at incredibly low rates, which made it easier to secure financing. Since 2023, many homeowners have been renewing their mortgages at significantly higher rates than they were “tested” for. These higher renewal rates put a huge strain on personal finances, coupled with inflation costs and household debt.

You can ask any of our brokers, but we’ve known for a long time that there has needed to be a change with the Stress Test, and it seems like OSFI is starting to implement some, albeit not at the individual level yet.

Earlier this year, there was a cap placed on lenders which limited the share of new uninsured mortgages* that exceed 4.5 times a borrower’s gross annual income.

*An uninsured mortgage does not have Mortgage Default Insurance, meaning the borrower had a larger down payment, typically over 20%.

What’s the change that OSFI is looking at now?

It appears that they are testing the idea of switching from the Minimum Qualifying Rate to a Loan-to-Income limit framework.

We hate to throw another acronym into the mix, but just so we’re clear. Loan-to-Income is a metric that compares your total monthly debt payments to your gross monthly income. The idea here is that, rather than being tied to a rate, as a borrower, your income would be the basis of your qualification.

Would this totally replace the Stress Test? It’s not clear. It may be an alternative or used in combination with the Stress Test to qualify borrowers. We won’t know until 2026 if a change will be happening, but we are happy to hear that this rule is being looked at.

Current Homeowners and the Stress Test at Renewal

There is some good news: if you’re simply switching lenders at renewal with no changes to your loan amount, amortization, or other terms, you won’t need to requalify.

This is a good change as the stress test requirement has not been required for insured switches since October of last year (2023).

Don’t Stress. Make a Plan

As mentioned, we still have at least half a year to go before we know more about any proposed changes coming to the Stress Test. Until then, if you’re renewing or wanting to tap into your home’s equity this year, here are a few things we recommend to get yourself in the best position:

1. Improve Your Credit Score: A higher credit score can help you secure better mortgage rates. #1 Tip? Make sure all your bills are paid on time. Every time. 

2. Lower Your Debt Load: Paying down existing debts improves your debt-to-income ratio, helping you qualify easier. Your Loan-to-Income ratio is still a huge part of the approval process. Most lenders want to see this under 45%, so if you can work on getting it there, you’re in a much better position.

3. Increase Your Down Payment: The more you put down, the less you need to borrow (and the less you’re impacted by the stress test).

4. Work with a Mortgage Broker: We can shop around for the best mortgage products tailored to your situation, potentially improving your chances of qualifying. 

The best approach? Go into the mortgage process with realistic expectations. Those expectations being that we’re going to ask you for a lot of paperwork…we know. It’s annoying. The process is also likely going to take longer if your credit score is lower or your debt load is higher. 

We try our best to be miracle workers, so if you have questions about getting into your first home or accessing your equity, our team is here to help.