Say goodbye to your stress-test rate of 5.25%

Posted April 29, 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 at the time when last June of 2021, 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 that they could still afford their mortgage payments if rates ever went up.

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

Rates are up, and so are house prices across Canada compared to a year ago (about 11.2% over March 2021). 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 3.89%, which would now be qualified at a 5.89% stress-test rate, and compare that to qualifying at the previous 5.25%.

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:

There are two sides to this coin of home affordability. On one side, the higher stress test helps to ensure that 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 home owners 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 higher-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?

The irony is, with the above example, if you decide to go with a variable rate right now, you'll get back that 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 have the 5.25% stress test ceiling still apply. 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 now is important, our current True North Mortgage variable rates may still fall within the 5.25% stress-test rate, for both lower payments now (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 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, for example, through down payment or debt reduction strategies, to improve your application for 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.

Because that prepared-for day is finally here (with the sun still to set on climbing rates), 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)

So even if (a big if) the stress test ends a few months from now or is reduced, it doesn't change things for home buyers or those wanting a mortgage change in the here and now.

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 help with 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 a 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 location near you.

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