How to stress test your mortgage

Quick facts: 

• Canada’s mortgage stress test requires mortgage applicants to prove they can qualify at a higher rate – called the Mortgage Qualifying Rate (MQR)  in order to get their mortgage.
• Today’s MQR is either 5.25% of a borrower’s contract rate plus 2% – whichever is higher.
• The mortgage stress test was implemented by OSFI, Canada’s banking regulator, in 2018 to improve the overall credit quality of mortgage borrowers, and to strengthen the overall mortgage market.

 

What is the OSFI mortgage stress test?

In Canada, borrowers applying for mortgages must also pass the mortgage stress test, a threshold put in place by Canada’s banking regulator – the Office of the Superintendent of Financial Institutions (OSFI) – to ensure their credit and financial standing is solid enough to carry their mortgage loan. It is part of OSFI’s Guideline B-20, which governs residential mortgage lending and underwriting practices for federally regulated financial institutions (FRFIs).

This threshold is referred to as the Mortgage Qualifying Rate (MQR), and it is currently 5.25%. Borrowers must prove they could afford to make their mortgage payment at this rate, or their contract rate plus 2% – whichever is higher. In fact, as the lowest five-year fixed mortgage rate in Canada is currently 5.29%, many borrowers are being stress tested in the upper 7% - 8% range. OSFI assesses whether or not to change the MQR on an annual basis, and determined it would remain at 5.25% for 2023.

Borrowers with existing mortgages are also stress tested if they choose to refinance their loans, and – in most cases – if they choose to switch lenders upon renewal. The only exception to this are transactionally-insured (also referred to high-ratio) mortgages, where less than 20% down has been paid on the home purchase. These high-ratio borrowers will not be re-stress tested if they change lenders at renewal time, as long as their original amortization period and loan amount remains the same.

The mortgage stress test was first put in place on January 1, 2018, with the primary goal of reducing mortgage risk in the Canadian marketplace; home values had increased rapidly in recent years, especially in urban centres like Toronto and Vancouver. By tightening up the qualification criteria for borrowers, and implementing more stringent requirements for underwriters, OSFI intended to improve the overall credit quality of mortgage holders in Canada, and to pad in a safeguard for borrowers in the event mortgage rates increased quickly.

Updates for the mortgage stress test in 2024

OSFI is considering a number of changes for Guideline B-20 in 2024; on October 16, 2023, the banking regulator made public the feedback it had received for these proposed changes. While the regulator has confirmed it won’t be changing the way the stress test works, they may tweak other aspects of the mortgage qualification process in Canada.

Among the updates could be a new loan-to-income ratio, meaning borrowers may be limited to how much mortgage they can qualify for, depending on their income. However, OSFI has confirmed it won’t be changing the existing GDS and TDS ratios. It’s also unlikely they’ll add a stress test exemption for low-ratio borrowers looking to switch lenders at renewal, despite advocacy efforts from the mortgage industry.

On December 12, 2023, OSFI announced the Mortgage Qualifying Rate for the stress test will remain at 5.25%, or the mortgage contract rate plus 2%, for 2024.

A mortgage stress test example

The current MQR requires borrowers to prove they could qualify for a mortgage at the rate of 5.25% or their contract rate plus 2% – whichever is greater. However, given today’s lowest mortgage rates all exceed 5.25%, that threshold has been rendered moot. Rather, all stress tested borrowers must add 2% to their rate. For example, let’s assume a borrower is offered a five-year fixed mortgage rate of 6% from their lender.

6% + 2% = 8%

This means they must prove they could still afford to make their mortgage payments (based on their income and other debt obligations) with a rate of 8%.

Wondering what kind of mortgage payment you could afford? Check out Ratehub.ca’s payment calculator to learn more.

5 tips for shopping for a mortgage

1. Use the stress test benchmark to pre-qualify yourself

Let’s say you’re ready to kick off your home search. Calling up a real estate agent and hitting a few open houses may seem like a logical first step – but this shouldn’t be your initial move.

Getting a mortgage pre-approval from a lender is the savviest way to approach the house hunt; this will give you an idea of your overall budget, which in turn will make you a more informed consumer – and it’ll give you a leg up once you are ready to make an offer. Getting a pre-approval is as easy as calling up a mortgage broker or a lender’s mortgage specialist.

2. Crunch your affordability numbers

There are so many financial considerations when buying a home; mortgage payments are certainly a big factor, but so too are aspects such as personal monthly expenses, property taxes, condo fees, and heating and electricity bills, just to name a few.

Check out Ratehub.ca’s Affordability Calculator to get a holistic, big-picture look to estimate the maximum home price you could afford.

3. Shop around!

A not-so-big secret when it comes to getting a mortgage – it can pay off big time to know your options. Just like comparing big-ticket purchase items – or even apples at the grocery store – for the best value, smart mortgage shoppers know not all rates offered by lenders are equal. So don’t just walk into your local bank brand and expect to receive the best rate – do your research and compare all of the options on the market; even half a percentage point less on your mortgage rate can make a huge difference in your regular payments and the amount of interest you’ll pay over the course of your mortgage’s amortization.

4. Consider using a mortgage broker

Which brings us to our next hot tip – get the inside edge on all the rates offered by multiple lenders by working with a professional such as a mortgage broker. Because mortgage brokers have relationships with numerous lenders, they can often offer their clients access to lower rates than they’d get on their own, even from the big banks. They do this by comparing mortgage products from a variety of banks and financial institutions, to find the best options for their clients, as well as special rates from trust companies and credit unions.

Mortgage brokers also work with smaller lenders who don’t carry the same overhead costs as the big banks, resulting in them offering lower rates and fewer fees.

The best part? Most mortgage brokers don’t charge you for their services. It is the lender that pays the broker’s commission. All the negotiating and paperwork is handled by the broker and they will assist you in the application process, from pre-approval to home appraisal.

5. Take advantage of First-Time Home Buyer Programs

As a first-time homebuyer, you’ll want to be familiar with various first-time home buyer programs that apply to your situation. Whether it’s a rebate you may qualify for or a tax-efficient way of funding your down payment, there are a number of government programs listed below that can help you potentially save some money when you buy your first home:

The First Home Savings Account is the newest program to be offered by the federal government, launched on April 1, 2023. This savings vehicle allows first-time buyers to save for a down payment while benefiting from the tax-free features of an RRSP, and the flexibility of a TFSA. Savers can contribute up to $8,000 annually to the account, up to a lifetime maximum of $40,000. Unlike the Home Buyers’ Plan, the funds never need to be paid back once they’re withdrawn for a home purchase.

• The Home Buyers' Tax Credit currently works out to a rebate of $1,500 for all eligible first-time home buyers.
  
• The Canadian government's Home Buyers' Plan (HBP) allows first-time home buyers to borrow up to $35,000 from your RRSP for a down payment, tax-free.
  
• If you qualify, land transfer tax rebates are available to first-time home buyers in the provinces of Ontario, British Columbia, and Prince Edward Island. There is also a land transfer tax rebate available for first-time homebuyers in the City of Toronto.
  
• If you buy your home before it’s built, or if you substantially renovate an existing home, you could qualify for a rebate for a portion of the sales tax. The GST/HST new housing rebate amount you can qualify for depends on the purchase price of the home.