Understanding Canada’s mortgage stress test

Understanding Canada’s mortgage stress test

On Behalf of Porter Ramsay LLP | Mar, 18, 2022 | Real Estate Law

Prospective homebuyers in British Columbia have many things to consider, from housing wish-lists to preferred locations to how to navigate an increasingly competitive market. Chief among these considerations is budget. While the budget you’re comfortable with is a largely personal matter, there are also external factors that impact the mortgage amount an individual may access. This is determined by banks, but is also governed by federal legislation through the mortgage stress test. 

What is the mortgage stress test?

The mortgage stress test is a tool that lenders are mandated to use to qualify applicants for mortgages. As of 2022, the prospective borrower must be able to shoulder the cost if their mortgage interest rate were to increase two percentage points, or to a flat rate of 5.25 percent (whichever is higher). 

Why does the mortgage stress test exist? 

This regulation is not without controversy, as some say it limits the buying power of new home purchasers in an already difficult market. However, proponents of the measure say that it helps keep people in a reasonable financial situation, ensuring that they can still pay their mortgage if interest rates were to rise. It also provides a cushion should something unexpected happen in one’s own life, such as a job change. Regardless of the arguments on both sides, the stress test is a reality that homebuyers need to consider when entering the market or upgrading their home. 

The best way to navigate the stress test, as with most things related to buying a home, is to speak with the professional such as a financial planner or mortgage professional. In addition, it can help to speak to a lawyer early on in the homebuying process. Speaking to people with experience and thorough understanding of the laws pertaining to home purchasing and ownership is important when making a large transaction such as this. 

Share this article