How to Stress Test Your Mortgage

What is the OSFI's mortgage stress test?

The current benchmark rate for Canadian mortgages sits at 5.34%. For those who are unaware of what this means, this is the rate that you must qualify for, or in simpler terms, be able to afford the payments of the mortgage at.

The rule was put in place for a couple of reasons. The primary goal with the implementation of the stress test was to reduce overall consumer debt. However, it was put in place to also cool down the rapid acceleration of real estate markets in areas like Vancouver and Toronto.

Unlike CMHC fees, which are insurance payments you need to make if you put less than 20% down on a home, the stress-test applies to every single mortgage provided by federally-regulated lenders. This wasn’t always the case, but was put in place in early 2018.

Due to new mortgage rules that went into effect Jan. 1, 2018, all homebuyers getting either a high-ratio mortgage (those with a down payment of less than 20% on the purchase price on a home) or an uninsured mortgage (those with a down payment of at least 20%) are now subject to a mortgage stress test and have to qualify at a rate that’s higher than they actually pay. (Previously, only high-ratio mortgages were subject to this test).

Today’s best mortgage rate in Ontario is 2.89% (as of Apr. 2, 2019), and the Bank of Canada’s qualifying rate is currently 5.34%. The stress test is based on qualifying for the greater of either the Bank of Canada qualifying rate or plus two percentage points to the contracted rate.

What that means is that even if you get a mortgage rate of 2.89%, the new stress test requires that you qualify for a mortgage of 5.34% — even though you’ll still be paying the contracted 2.89%.

Determine Your Monthly Mortgage Payment

Input your down payment, select your interest rate and determine your monthly payment.

Try pre-qualifying yourself, using the benchmark

So you’re looking at home listings and visiting open houses, who you gonna call? NOT your realtor! Most Canadians think the first step in the home-buying process is to contact a realtor and start looking at homes. This. is. incorrect.

Once you’ve saved up enough for your target down payment amount, the first thing you should do is get a mortgage pre-approval. Call your mortgage broker or your bank’s mortgage specialist first before your realtor.

3. Make sure you can afford the home you want

Many of us dream of buying a home but we also need to be realistic about what kind of properties we can actually afford. Your household income, personal monthly expenses, and home costs like property taxes, condo fees, and heating & electricity bills all factor into the total amount you can borrow.

Use Ratehub’s Affordability Calculator to estimate the maximum home you can afford.

Want to Know How Much You Can Afford?

Input your monthly income and expenses, to estimate how much you can afford.

4. Shop around!

You shop around for a home when you house hunt so make sure you do the same when you get a mortgage. Don’t just go to your local bank branch and expect to receive the best rate (because you probably won’t!). Do your research and compare mortgage rates. You should also consider using a mortgage broker who will negotiate rates on your behalf.

Keep in mind that 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 time.

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5. Consider using a Mortgage Broker

Did you know mortgage brokers can get you a mortgage with a Big Bank, but at lower rates?

Mortgage brokers compare mortgages from a variety of banks and financial institutions, to find the best options for their clients.

In addition to the Big Banks, mortgage brokers have access to mortgage products and special rates from trust companies and credit unions. They also work with smaller lenders who don’t have the same overhead costs as the Big Banks (and therefore often have 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.

6. Take advantage of First-Time Home Buyer Programs

As a first-time homebuyer, you’ll want to be familiar with various 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 Home Buyers' Tax Credit currently works out to a rebate of $750 for all eligible first-time home buyers.
  • The Canadian government's Home Buyers' Plan (HBP) allows first-time home buyers to borrow up to $25,000 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, and can only be claimed if the net purchase price is $450,000 or less.

7. Keep on Saving

Your down payment and your monthly mortgage payments are just the beginning of your home purchase journey. There are a lot of additional costs that come with buying your first home such as closing costs, land transfer tax, and CMHC insurance. That’s why a savings plan is essential even after you have saved enough for your down payment.

Pro tip: A good rule of thumb is to reserve 3-5% of your home’s purchase price to cover your home closing costs. You can use Ratehub’s Payment Calculator to estimate just how much cash you’ll need.