Say goodbye to your stress-test rate of 5.25%

Both variable and fixed rates are higher, which bumps up your qualifying rate, too.

Even if you can afford the now-higher rates, you'll qualify for less home. What does it mean for your mortgage — and how can we help?

Updated July 19, 2022

Remember when the 5.25% stress-test rate seemed kinda high?

That's when mortgage rates were a lot lower (for a long time).

It seemed a sizeable jump in June of 2021, when the Feds upped their required Mortgage Stress Test Rate to 5.25%. They were worried about the continuing lower rates and wanted to increase the margin of safety for Canadians, so they could still afford their mortgage payments if rates ever went up.

Well, rates are up.

And now, almost all variable and fixed mortgage rates have increased beyond that stress-test 5.25% rate ceiling set by the government.

A lender will use whichever is higher — either a rate of 5.25% OR your actual rate plus 2.0% to qualify your mortgage loan amount. So for today's higher rates on 1 to 5-year mortgage terms, the 5.25% ceiling is obsolete.

Fact: The Mortgage Stress Test was first initiated in 2016 because of sustained lower rates, and at the time, only applied to insured mortgages (less than 20% down payment).

What's the stress-test impact on your mortgage affordability right now?

Rates are up, and house prices are still considered high across Canada, despite the drag on home sales due to recent rate hikes. But even if you can afford the higher rates right now and the higher stress-test rate, you'll qualify for less with a lender for your mortgage amount.

How does that work? Let's take True North Mortgage's current 5-year fixed rate of 4.54%, which would now have to qualify at a 6.54% stress-test rate, and compare that to the previous 5.25% qualifying rate.

We'll assume some basic details, like a $100K annual income, $3,800 property tax of home purchased, $100 monthly heating costs, 25-year amortization, and 5% down payment:
5.25% old stress-test rate 6.54% new Stress-Test Rate
Home price you'll be approved for $475,000 $430,000
Reduction of home buying power About 10% less (the higher the rate, the less you qualify for)

There are two sides to this coin of home affordability. On one side, the higher stress test helps ensure you can afford your mortgage payments if fixed rates continue to increase. After all, 25 years is a long time to pay off your mortgage, and many first-time homeowners don't have budget experience in dealing with rate changes.

On the other side of the coin, if you're trying to find a home, especially in high-priced markets, you'll have even less purchasing power than before. That's if you stick with a fixed rate for mortgage payments that stay the same during your term.

Should you get a lower variable-rate mortgage instead?

With the above example, the irony is that if you decide to go with a variable rate right now, you'll get back an extra boost in home-buying power.

Most variable rates are lower than current fixed rates despite the recent increases to the prime rate — enough to lower your qualifying rate compared to a fixed rate. But, more increases are coming, as indicated by the Bank of Canada; how many and how quickly is more of a spoiler alert than a promise, because we all know that future rate hikes like to evade accurate prediction.

First-timers often feel more comfortable with a fixed rate and the budget certainty it provides over their term. But if qualifying for more home right now is important to you, our current True North Mortgage variable rates may provide some stress-test relief for lower mortgage payments (which will increase along with prime) and a higher pre-approval amount.*

Do you have a strong mortgage application?

Depending on the lender, you may qualify for more despite the federal stress test limit or for a lower rate based on your particular financial details. Our expert brokers can check with several accredited lenders to find your best rate and product fit for your optimal pre-approval numbers.

We can also help you find ways to qualify for more home. Strategies to increase your down payment or reduce debt may improve your application and provide a stronger argument for lender acceptance.

Fact: A mortgage stress test is applied by lenders for all your mortgage needs, including new purchases, renewals and refinances. And for any rate type (variable or fixed), or term length.

Will we ever say goodbye to the stress test itself??

The mandatory stress test was introduced during a time of sustained lower interest rates to help protect Canadians and lenders from potential financial catastrophe if (when) they one day rise again.

That prepared-for day is finally here (with the sun still to set on climbing rates), so many wonder if this test will soon be past its prime. True North Mortgage's Founder and CEO, Dan Eisner, comments in a recent article by Housing Reporter Donovan Vincent:

"I wouldn't be surprised if they just eliminate the contract rate plus two per cent portion of the stress test; it's a bit too aggressive. It doesn't make sense when the fixed rates are in the four per cent levels.
– Dan Eisner in 'Canadian bank regulator hints it could change mortgage 'stress test' rules before year's end,' May 12, 2022, The Standard (St. Catharines)

Even if (a BIG if) the stress test eventually ends or is reduced, in the here and now, home buyers (or those wanting a mortgage change) have to adjust their expectations inline with the current rules.

Say hello to great mortgage advice to save money and stress.

There are a lot of changes underfoot in the mortgage industry, such as the potential for higher rates, changing government policies, and lenders reviewing their mortgage bottom lines based on market volatility (like supply and demand issues). But you don't need to panic!

We're here to provide your best rate and exceptional service — to save you a pile of cash. We've already helped thousands of Canadians get into their first home, next home, or vacation or rental property. Not to mention all their other mortgage needs along the way, like renewals and refinances.

And, we're not going anywhere. With over 15 years under our belt, we're here for you in Canada — online, over the phone, through our chat bubble, or at a store near you.

*Mortgage qualification and pre-approval are based on individual financial factors and lender requirements.

Your best rate can make a difference. Give us a shout.