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The Mortgage Stress Test: What It Means if You’re Buying a Home

Nov. 1, 2019
3 mins
A mortgage broker breaks down the paperwork a young couple with have to sign

It’s been almost a couple of years since the mortgage stress test came into effect. So, we thought it was the perfect time to revisit it and clear up any confusion. The mortgage stress test took effect January 1, 2018, affecting how much mortgage money Canadians are able to borrow towards the purchase of a home.  Let’s look at the mortgage stress test in greater detail and what it means for those planning to buy a home in the coming months. 

What’s the mortgage stress test? 

Whether you’re buying a home with more or less than 20% down, the stress test affects you. Before the new stress test came into effect January 1, 2018, depending on the length of your mortgage term, you might have only had to qualify based on your mortgage rate. However, now everyone is required to pass the stress test in order to get a mortgage. 

To pass the stress test, you must be able to prove that you can afford the greater of your mortgage rate plus two percent and the Bank of Canada’s five-year benchmark rate (currently at 5.19%). Let’s say you submit your mortgage application to a lender offering 3.30% on the five-year variable rate. In that cause, you’d need to qualify at 5.30%, since 5.30% is greater than 5.19%. 

How does the stress test affect my home-buying budget? 

If you’re serious about buying a home this year and you haven’t been pre-approved for a mortgage since the stress test came into effect, you’ll want to know how it affects you. 

When compared to the rules prior to January 1, 2018, you’ll be able to spend about 20% less on a home. Let’s say you were able to spend $500K on a home prior to the stress test. Assuming your income and down payment remain the same, you might only be able to spend $400K on a home now that the stress test exists. 

If you’re looking for a property in a less expensive real estate market like London or Thunder Bay, the stress test may not be a big deal, but if you’re purchasing a home in a city like Toronto, the stress test is likely to impact you big time. You may be forced to “drive until you qualify” or instead of buying a house, you might only be able to afford a townhouse or condo. 

What impact has the stress test had on the real estate market? 

While it’s tough to pinpoint one exact reason, there’s no denying that the real estate market has slowed down since the stress test came into effect.

The stress test has been around for almost a couple years now, so buyers are starting to adjust to it, and it’s having less of an impact. 

In Toronto detached homes were once the most coveted property types. However, since the stress test came into effect, condos have seen the highest price appreciation out of any property types and the reason is simple, affordability. 

If you’re looking to buy a property, now is still a great time to buy. Mortgage rates are at a near record low. Just be sure to get pre-approved for a mortgage ahead of time because you might not qualify to spend as much on a home as you thought under the stress test. 

Sean Cooper

Sean Cooper is the author of the new book, Burn Your Mortgage. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Financial Journalist, Speaker and Money Coach, his articles and blogs have been featured in publications such as The Toronto Star, Globe and Mail, Financial Post, Tangerine: Forward Thinking blog and TheDot. You can follow him on Twitter @SeanCooperWrite.

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