The latest data from ratehub.ca shows that higher interest rates are pushing up mortgage stress test amounts by some $18,000 per borrower or couple. Stress tests are pushing up the costs of borrowing and are forcing many prospective buyers to opt for variable rate mortgages instead of fixed rate mortgages given the cost increases. Ratehub.ca is predicting that fixed-rate borrowers would face a stress test rate of 7.21% given that the rate has increased by two-thirds in the last four months, which is why the most stretched borrowers are opting for variable rates. The OSFI, or Office of the Superintendent of Financial Institutions, the federal banking regulator, raised the stress test rate in response to higher overall rates to protect the banks from risky mortgage borrowers.
The Canadian mortgage stress test applies to anyone applying for a mortgage, refinancing their current home loan, or renegotiating the terms of their mortgage contract with a federally regulated lender. And while provincially regulated lenders have more flexibility when it comes to mortgage approvals, many still use the test to evaluate customers’ financial risk. This means that most home buyers in Canada are subjected to the stress test. Think of the stress test as a set of rules major banks must use to determine if you qualify for a mortgage. Because mortgage rates can fluctuate, as they have in recent months, the Canadian government has set a minimum qualifying rate to reduce the risk involved in mortgage lending. This helps to ensure you’ll still be able to afford your mortgage payments if interest rates increase beyond the rate originally stated in your contract. In other words, it’s not you but your finances that are put to the test.
Real estate analysts are calling on the federal government to implement a review of the stress test and how the OSFI sets the stress test rates. The mandatory stress test rate set the qualifying rate on uninsured mortgages at either two percentage points above the contract rate, or 5.25 per cent, whichever is greater. Some analysts are calling for longer mortgage terms or looser rules on mortgage changes. Stress tests requirements are adding tens of thousands of dollars to mortgage amounts across the country. Where sale prices and mortgage amounts are greater, the stress test amount grows.