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Canada’s Stress Test Rate Falls. What It Means for Buyers

Aug. 13, 2020
3 mins

The minimum mortgage stress-test rate dropped this week thanks to a fresh round of posted-rate cuts by the country’s big banks.

Starting Wednesday, Aug. 12 or Monday, Aug. 17, depending on the lender and mortgage type, buyers will need to prove they can afford mortgage payments at 4.79%. That’s 15 basis points less than the current qualifying rate of 4.94%.

The stress test rate has made a slow descent from its recent high of 5.34%, where it spent much of 2018 and 2019.

Small Bump in Purchasing Power

The reduction means buyers will now require slightly less income to qualify for their mortgage. Or to put it another way, they’ll be able to afford a slightly more expensive home.

This latest drop on its own won’t make a huge difference for most buyers. For example, someone making $70,000 a year and buying a home with 5% down will be able to afford a 1.2% or $4,000 more expensive home.

The cumulative effect of continued drops to the stress test rate, however, is more substantial.

Compared to the benchmark rate high of 5.34% in 2019, that same buyer above with a 5% down payment can now afford 4.5% more home, or $15,000+.

Suspended Changes to the Stress Test Formula

Despite the incremental affordability relief, industry members say it’s time for the government to revisit its proposed changes to the stress-test formula, which were suspended in March due to the pandemic.

In April, the Department of Finance said borrowers with insured mortgages would be stress tested based on a rate equal to the weekly median 5-year fixed insured mortgage rate plus 2%. Had that been enacted, today’s stress test rate might be as low as 4.29%.

“Continuing to pause the previously announced changes leaves in place an unnecessarily punitive, pro-cyclical and suppressive minimum qualification rate that is more than double the expected interest rate most borrowers would pay,” Mortgage Professionals Canada President and CEO Paul Taylor told last month.

Stress Test Refresher: There are currently two variations of the stress test in effect, depending on whether your mortgage is default insured or uninsured. Both are based on the benchmark qualifying rate:

  • Default-insured mortgages (those with less than 20% down payments) are stress-tested on the greater of your contract rate or the Bank of Canada's 5-year fixed posted rate (a.k.a. benchmark rate).
  • Uninsured mortgages (those with 20%+ down payment) are stress-tested on the higher of your contract rate plus 200 bps, or the benchmark rate.

The RATESDOTCA editorial team are experienced writers focused on sharing stories and bringing you the latest news in insurance and personal finance. Our goal is to provide Canadians with the information and resources they need to make better insurance and financial decisions.

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