Mortgage Stress Test: What Is It and Is It Really Stressful?

If you’re planning to buy a home with a real estate agent in Ontario, Canada, you’ve likely heard about the “mortgage stress test.” But what exactly is it and how does this impact you?

This test may sound daunting at first but it’s designed to protect homebuyers from going “house broke” and here’s why!

What Is the Mortgage Stress Test?

The mortgage stress test is a financial safeguard introduced by the Canadian government to ensure homebuyers can afford their mortgage payments even if interest rates rise. It’s essentially a way to assess your financial resilience before lenders approve your mortgage. Not only does this protect the lender but it essentially protects the buyer from taking on debt that they can’t handle.

We recommend connecting with a mortgage agent for a pre-approval before going on the hunt for homes with your real estate agent in Ontario to get a clear budget of what mortgage amount you are able to secure.

Why Was the Stress Test Introduced?

The stress test was implemented to address concerns about household debt and housing affordability in Canada. It aims to:

Prevent borrowers from overextending themselves financially.
Protect the housing market from the impact of rising interest rates.
Reduce the risk of defaults during economic downturns.

The Bank of Canada raised interest rates 10 times between March 2022 and July 2023. Take this period as an example that we cannot predict the economy and it is possible for such downturns. The stress test is there to help test out homeowners’ financial resilience if we were to experience the same inflation patterns as 2022-2023.

Who Needs to Take the Stress Test?

The mortgage stress test applies to:

All insured and uninsured mortgage borrowers
Refinancing
Changing mortgage lenders
Taking out a second mortgage
Applying for a home equity line of credit

Looking to get an idea on the value of your home in today’s market? Reach out to us today for a FREE HOME EVALUATION.

How Does the Stress Test Work?

When you apply for a mortgage, lenders evaluate your ability to make payments based on either:

The lenders mortgage rate you’re offered plus 2%, or
The qualifying rate set by the Bank of Canada, which is currently 5.25%

This means you need to qualify for your mortgage as if the interest rate were higher than what you’ll actually be paying. This added buffer ensures you’ll still be able to manage payments if rates increase in the future.

How Does It Impact Homebuyers?

The mortgage stress test affects ~~homebuyers~~ real estate buyers in several ways:

Reduced Purchasing Power: You may qualify for a smaller mortgage amount than you initially anticipated, which will impact the price range and types of homes you can afford.
Stronger Financial Planning: While it may feel restrictive, the stress test encourages safe borrowing as taking on a mortgage is significant financial responsibility.
Higher Down Payments: To afford a home within your desired price range, you might need to save a larger down payment to offset the reduced mortgage amount.

Tips to Navigate the Mortgage Stress Test When Buying Real Estate

Work with a Mortgage Professional: A mortgage broker or advisor can help you understand your options and find a lender that meets your needs. A mortgage professional will be able to provide insight on locking in a fixed or variable rate and which option makes the most sense for you.
Improve Your Financial Profile: Reduce debt, improve your credit score, and increase your savings to strengthen your application.
Consider Your Budget: Focus on what you can comfortably afford, even if it means adjusting your expectations.
Lock in a Rate: With interest rates fluctuating, locking in a rate early can help you secure better terms while you’re house hunting.

Get in Touch with Bob Odanovic for Real Estate Services in Ontario!

If you are looking to begin your journey to homeownership, reach out to us today and we will be happy to help design a plan tailored to your needs and connect you with our top mortgage professionals!