Updates to Canada's Mortgage Stress Test

You may have heard about changes being proposed to Canada's Stress Test—a set of rules that came into effect in 2018, and were designed to ensure that homebuyers with a down payment of 20% or more could continue to afford their mortgage should interest rates rise down the road. Here is a summary of what's changing and how it impacts today's homebuyers.

An overview of Canada’s current mortgage stress test

In January 2018, the Federal Government (more specifically the Office of the Superintendent of Financial Institutions or OSFI) implemented the B-20 mortgage rules in Canada.

Under these rules, homebuyers with a down payment of 20% or more (known as uninsured buyers), were subjected to stricter qualifying criteria to determine whether they would be able to afford their principal and interest payments should interest rates increase. The test required a would-be homebuyer to prove they could afford to make their payments at the 5-year benchmark rate published by the Bank of Canada (4.79%) or the customer's mortgage interest rate plus 2% - whichever was higher.

Recently, OSFI proposed a change to that criteria. As of June 1, 2021, homebuyers with a down payment of 20% or more will be required to qualify at a newly defined OSFI minimum qualifying rate of 5.25% or the customer's mortgage interest rate + 2% - whichever is higher.

In addition, Canada's Department of Finance has decided to harmonize qualifying rules between insured and uninsured mortgages, which means both insured and uninsured mortgages will be qualified at the greater of the customer's mortgage interest rate +2%, and the OSFI defined minimum qualifying rate (5.25%) as of June 1, 2021.

Want to learn more about Mortages? READ:

Mortgages 101 – (Almost) Everything you've ever wanted to know about mortgages

What do the changes mean for today's homebuyer?

Assuming all things are equal, the average homebuyer would see their overall purchasing power reduced by approximately 2-4% as a result of an increased minimum qualifying rate.

Here's an example of how these new qualifying rate rules impact borrowing amounts

Let's say a buyer has a down payment of $100,000, which is 20% or more of their desired home's purchase price. They have negotiated a five-year fixed term mortgage rate of 2.29% and have approximately $700 in other monthly debt obligations. As you'll see by the chart below, under the new rules, today's home buyer would see a reduction of approximately $18,000 in their purchasing power.

Are similar changes coming to insured mortgages?

Yes. As of June 1, 2021 both insured and uninsured mortgages will be qualified at the greater of the customer's mortgage interest rate +2%, and the OSFI defined minimum qualifying rate (5.25%). This means, a homebuyer will be required to qualify at the Bank of Canada's new benchmark rate (5.25%) or their mortgage interest rate plus 2% - whichever was higher, regardless of the size of their down payment.

How will this change impact a buyer who is renewing their mortgage?

If you're renewing your mortgage and choose to stay with your existing lender, you won't be subject to the stress test. However, if you decide to refinance your mortgage, you'll be treated as a new borrower and must qualify under current mortgage stress test rules which, as of June 1^st, comes with a newly defined OSFI minimum qualifying rate of 5.25%.

How do I get more information?

Whether you're buying your first home or renewing your mortgage, it's important to understand what type of mortgage will meet your specific needs. Speaking with a mortgage specialist can help you make this decision. To get specialized advice to help with your home ownership journey, visit td.com/ca/en/personal-banking/products/mortgages/.

Interested in finding out how much of a mortgage you could afford? Here is a link to the TD Affordability Calculator.

Learn more about real estate trends and advice by checking out the findings of the TD 2021 Real Estate survey.