Canadian Mortgage Stress Test 2021

Learn about the Canadian Mortgage Stress Test 2021 rules and how they apply to get you approved for a Canadian bank mortgage.

In this video, I’m going to give you a simplified explanation on what it is, and show you exactly how to determine if you pass.

Victor here, and welcome to a series of videos that help Canadians get approved for a mortgage. If you’re new here, and want to receive valuable mortgage tips, consider subscribing. 

What Are The Canadian Mortgage Stress Test 2021 Rules?

So, what is a mortgage stress test, and how do you study for it? Relax, it’s not that kind of test.  It’s a new mortgage rule introduced in 2018. To qualify for a mortgage at a bank, you will need to pass this test using the “minimum qualifying rate.”

And that rate depends on your down payment. If it’s less than 20%, you need a high-ratio mortgage. And that qualifying rate is either the Bank of Canada’s five-year benchmark rate (which is 4.79% as of January 2021), or the rate offered by your lender, whichever is higher.

Otherwise, if your down-payment is greater than 20%, your qualifying rate is either 4.79% or the rate you negotiate with your lender plus 2%, whichever is higher.

Why Do The Banks Need A Mortgage Stress Test?

Ok, we need an example. But before we get into an example, let’s talk about why the banks do this. As the name of the rule implies, it puts your affordability to the test. Today, interest rates are at record lows, but what if they rise over the next few years? How would you cope with higher mortgage payments? Basically, the test helps you come face-to-face with the rising costs of being a homeowner. And knowing this now, takes the guesswork out of how much you can afford. Plus, you’ll avoid nasty last minute surprises.

Canadian Mortgage Stress Test Example

Ok, so let’s consider this example, where you need a $500,000 mortgage, amortized over 25 years. Let’s say your amazing broker got you an awesome rate with a bank at 1.59%.

Your monthly payment would be $2,019. That’s great, isn’t it? Now hold on.  Remember, the qualifying rate is 4.79% or the rate offered by your lender, whichever is higher.  In this case, 4.79% is greater than 1.59%, so we need to use that instead.

At 4.79%, your monthly payment would be $2,848, a difference of $829 a month! That’s an increase of 41%!

Would You Pass or Fail the Mortgage Stress Test?

To be clear, this is NOT the payment you will be making right now! This is only a test. A “stress test”, to be exact. It asks the question, “could you still afford your home if your payments went up by $829 a month?” And if the answer is “yes”, then congratulations, you pass the test! 

Otherwise, you might have to settle for a home of lesser value, pay down debt, or increase your down-payment.

Canadian mortgage stress test calculator
Mortgage Stress Test Calculator

To determine right now if you would pass the mortgage stress test, follow this link. I have created a calculator that easily and quickly tells you if you would pass, given your specific needs.

How To Use The Mortgage Stress Test Calculator

Here’s a quick tutorial. The calculator is pre-populated with default numbers from the example discussed. Simply replace those with your own. First, enter the purchase price, or the price of a house that you’re considering. Followed by your down payment. Enter it as a percentage or dollar value. For the rate, enter the mortgage rate you’re being offered. If you don’t have an offer, leave it as it is.  The calculator automatically determines the stress test rate, so you don’t have to worry about that.

In the next section, enter your total gross annual household income. That’s all the combined income from all applicants, before taxes. Leave the property tax, heating cost, and condo fee as is, unless you know the specific costs for your property.

Next, enter all your monthly debt payments for credit cards, lines of credit, car payments, and any other monthly debt obligations.  Scroll down, and see your results instantly.

If you pass, congratulations! You’re likely to be approved at a bank for your requested mortgage. Contact me, and I’ll help you shop for the best rate and terms from among 50 of Canada’s leading lenders. That’ll save you a ton of time and money!

What If You Don’t Pass The Test?

If you didn’t pass, don’t worry. Play around with the figures to see what could be giving you a failing mark. Try to lower the purchase price, or increase your down payment. It’s also possible that your monthly debt payments are too high.  In any case, you may still have other options. Some lenders are more lenient, or offer mortgages designed for borrowers that are self-employed, or have less than perfect credit.

Have any questions? Then please don’t hesitate to contact me.

Navigating all these mortgage rules can be complicated, but I’m here to help! Book your free discovery call and we’ll figure it out together.

Victor Camba B.Eng

Victor is a leader in sales and business development, with nearly 20 years experience in alternative mortgages and private lending in real estate. His ongoing success has been attributed to his proven ability to connect and cultivate relationships with clients, investors and advisors. He has a successful track record of identifying and developing proven sales strategies for investments and financing instruments, mortgages, and insurance. By providing customized marketing and sales collateral, coaching and training, he has helped clients achieve sustainable prosperity and build long-term relationships.