How Can You Avoid the Mortgage Stress Test?

Last year’s mortgage stress test frustrated many a first-time homebuyer. Tens of thousands were suddenly unable to make their preferred home purchase—or purchase any home at all.

Despite that, many have avoided throwing in the towel on their home-buying dreams. They’ve found workarounds to OSFI’s tougher qualifying rules that don’t involve saving up a bigger down payment, getting a co-borrower, downgrading their home aspirations, etc.

In many cases, these loopholes have helped them avoid the risk of home prices continuing to rise and further price them out of the market.

What people are doing is simple. They’re choosing a different lender—a lender that offers non-federally regulated mortgages.

In fact, there a growing number of prime lenders are offering mortgage products specifically designed to avoid the stress test. Here are some of the lender types people are using to get around Ottawa’s mortgage stress test. (* For more details about the stress test, see the stress test refresher at the bottom of this article.)

Mortgage Finance Companies (MFCs)

• A few of these lenders qualify borrowers using the contract mortgage rate (e.g., 3.39%) instead of the stress test rate (5.19%+)
• They also use 30-year amortizations to reduce borrower debt ratios—making the stress test easier to pass
• MFCs permit maximum gross debt service (GDS) and total debt service (TDS) ratios of 39/44 (whereas many lenders have lower limits)
• Minimum credit scores are often 680 to 720, but sometimes as low as 620 (at an extra cost)
• Some even allow harder-to-prove self-employed income
• Rates start at 3.39% today (a few charge application fees of 1%)

Credit Unions

• For conventional purchases and refinances, a minority of credit unions qualify applicants at the contract rate with a 30-year amortization
• As with MFCs, a mortgage broker is your greatest ally when comparing CUs. Most brokers are familiar with the various mortgage products on the market that allow borrowers to get around the stress test
• Non-stress test rates at CUs are comparable with the MFC rates above (most CUs don’t charge extra lender fees)
• Note: Not all brokers deal with all credit unions offering non-stress test mortgages. If yours doesn’t, you might have to call up credit unions or do some research on your own—or find another broker

Private Lenders and MICs

• Because private lenders and mortgage investment corporations (MICs) don’t have government regulators telling them what to do, stress test rules don’t apply to their mortgages
• The downside, however, is that they’re meant to be highly flexible, shorter-term solutions for those in a crunch. And they charge for that flexibility
• Rates can be significantly higher: 5.99% to north of 10%
• Payments are often interest-only to minimize the cash flow impact
• It’s an exceptional case where resorting to a private lender or MIC to avoid the stress test makes sense

Rates on Non-Stress Tested Mortgages

Few things are free in life and that includes more accommodating mortgages. Given the risk is theoretically higher, lenders impose surcharges for borrowers who can’t pass the federal stress test.

For prime borrowers, you might pay 50 bps extra for the privileges of qualifying at the contract rate. That’s about $9,500 more interest over five years on a $400,000 mortgage versus a typical big bank.

Do you want a home that bad?

Or perhaps the better question is, can you afford not to buy now? If Canada’s average home price (currently $525,125) rises 2% in value annually for two years, and you didn’t buy, that’s $21,215 of “lost” equity. Of course, prices go in reverse too—so we’ve heard.

Keep in mind, because these products are so niche, you won’t find them on RateSpy. Not for now, at least.

*Stress Test Refresher

Being “stress tested” means you must prove to a lender that you can afford payments at a higher interest rate. This better prepares you in case rates increase or you have an income loss.

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 less than 20% down payment) are stress-tested on the higher of your contract rate plus 200 bps, or the benchmark rate, which is currently 5.19%.