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Decoding Changes to the Mortgage Stress Test

Wednesday May 12, 2021

Mortgage Stress Test

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It’s happening again. The Office of the Superintendent of Financial Institutions (OFSI) is planning to modify the mortgage stress test. Proposed on April 8th, the new rules are set to take effect on June 1st. While many Canadians know that changes of this kind have an impact on home affordability, some are unsure about how they work.

Here, we’ll delve into upcoming modifications to the stress test—and what they mean for buyers…

What is the mortgage stress test?

The federal mortgage stress test, set by Canada’s top banking regulator, is a way of determining how much home you can truly afford. It’s about accounting for worst-case scenarios. What happens if you’re let go from your job—or interest rates rise suddenly and steeply? Considering these “what ifs” can help prevent buyers from defaulting on mortgages they can’t afford.

The test is essentially a qualifying rate, and it applies to every buyer (with the exception of those who go to certain alternative lenders, a move that can come with some drawbacks). It means that many would-buyers may find themselves unable to purchase that home they’ve had their eyes on. Currently, the average qualifying rate among the country’s top banks is 4.79 per cent. That’s almost certainly about to change.

What are the changes being proposed?

Let’s get into the nitty-gritty. The OSFI has proposed raising the qualification rate to either 5.25 per cent (the five-year benchmark), or the borrower’s qualified rate plus two percentage points—whichever is higher.

These changes are intended to add some balance to Canadian real estate markets. They’re meant to reduce upward pressure on prices, help tackle household debt, and prevent buyers from getting into some sticky financial situations. Of course, they can also greatly reduce your purchasing power—an added frustration in an already heated market.

Looking at the big picture

Home buyers who enter the market after the changes are passed will need to prove that they can handle the “stress” of the new, higher rate. Unfortunately, many will not make the cut. As a result, we may well see a flood of purchasers pushing to close before June 1st.

We feel that the best time to purchase is when you’re really and truly ready. If that’s now, that’s great! If it’s not, your best best bet is to work with a talented team of professionals who can help you out down the line.

The right mortgage broker can help you get a firmer understanding of the factors that impact your qualification. They may suggest steps like reducing your debt to improve your purchasing power.

On the real estate side, a skilled local real estate agent will know your area—and the local market—inside and out. Whenever possible, they’ll help you find homes within a realistic price range that check off your must-have boxes. Are you ready to take the first step?

Ready to buy your next home? We’ll help you tackle every detail—and ensure you know what to expect. Get in touch to get started!

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