What is the Canadian mortgage stress test?

Putting the stress test into practice

It’s important to understand that the mortgage qualifying rate isn’t a real rate you’ll see on your mortgage documents: it’s an inflated, hypothetical rate that’s created to lower the amount of the mortgage you qualify for and create added lending security for mortgage brokers and banks.

For example, say you have a 4% fixed rate approval, the stress test will measure your finances against a 6% qualifying rate. 

If you have a 2% variable rate approval, the test will benchmark you against a 5.25% rate. 

For example: Let’s say you wanted to borrow $400,000 at a rate of 1.78%. You would have to prove you can afford a mortgage payment of about $2,385 per month (which is an interest rate of 5.25%), even though your actual monthly mortgage payment  of $1,650 (with your actual offered interest rate of 1.78%) would be a lot lower. 

Is there any way around the stress test?

Understandably, the stress test can put limitations on borrowing for many aspiring homeowners. So you may be wondering, is there a way around it? The answer is no. The Canadian stress test is a requirement for mortgage lending at major financial institutions. 

If you’re worried about passing the stress test, you may want to consider getting a co-borrower or guarantor to help with the approval process. 

Don’t stress, it’s just a test. And you can prepare. 

With rising interest rates and Canadian mortgage regulations changing, the stress test may seem more intimidating than ever. But it doesn’t have to be. 

Being prepared with a financial plan to save more money for a downpayment and increase your earnings can lift the weight of the stress test. And using a mortgage calculator can help you benchmark the stress test in advance before applying for your mortgage approval. 

And if one-on-one time with a mortgage advisor is the next step in your journey to home ownership, feel free to connect with one of Pine’s mortgage advisors for any questions you might have about your finances or how to get approved.