New Level of Stress Test Makes It Difficult to Obtain a Mortgage in Canada



Claiming a home loan is a little more difficult today as the federal government has raised the minimum financial bar that anyone applying for a mortgage must meet.

Ottawa today raised its mortgage stress test, setting a new level at 5.25 percent – or two full percentage points higher than the borrower’s mortgage rate, whichever is higher. This is about half a percent more than before.

Launched in 2017 to cool the overheated market at the time.The stress test is the minimum threshold that anyone applying for a home loan in Canada must meet. The loan itself does not become more expensive from this. Rather, it ensures that anyone who gets the mortgage can pay it back if rates rise.

It is not hard to find five-year fixed mortgages with an interest rate of about two percent now, floating rate loans are even cheaper, and fixed rate loans a little more.

Despite these low scores, a look at the numbers shows how big the impact of a higher stress test bar can be. Currently, if a buyer wanted to buy a $ 400,000 home and had a $ 100,000 down payment, he would need a $ 300,000 mortgage. At two percent on a standard 25-year loan, this would cost the buyer $ 1,270 a month. But under the new rules, the mortgage application will be verified as if the rate was 5.25%. At this level, the loan will cost the buyer more than 40 percent monthly – $ 1,788.

Although this higher payment is only theoretical, if the buyer cannot pay that additional $ 518 per month based on their income level, total debt burden and other factors, the lender will not be able to lend money to him. These buyers will then have to look for a cheaper home to pass the test. The impact on the market as a whole is to reduce the pool of qualified borrowers in the hope of cooling the market.

Refrigeration market

“The stress test is only coming into force today, but there are already signs that the market may cool off even before it is introduced,” said James Laird, co-founder of the rating comparison site

“This does not mean that the housing market is slow, it is just slower than in March this year,” he said in an interview. “Despite this rule change, March 2021 is likely to be the peak.”

Canada’s housing market ended the year like no other in March 2021, as that month was the first 12-month period to mark the start of a pandemic when home sales slowed to a crawl due to uncertainty. But in the spring, summer and fall, demand from Canadians, confined to homes due to various quarantine restrictions related to COVID, sparked a wildfire in the housing market, causing volumes and prices to skyrocket through 2020 and this year.

VIEW | Now it is more difficult to apply for a mortgage in Canada:

Starting June 1, Canadian home buyers will face a tougher mortgage stress test. The new rules will make it harder to enter the housing market now, but may make it easier for others in the future. 1:57

The median price of a home in Canada sold in March was $ 716,828, up more than 30 percent over the year. This was the largest annual increase in history.

April is generally a stronger month for home sales than March, but Laird said the markets are back on Earth slightly in April 2021. Prices were still up strongly compared to last year, but markets slowed as the talk shifted to what policies can and should be done to cool the real estate market.

“We’ve seen some of the foam that we saw earlier this year leave the market,” he said.

The stress test is likely to cool things down even further, Laird said, lowering purchasing power by about five percent on average. And he says that while potential buyers may complain about not being allowed in, in the long run it could be good news for everyone if home prices fall.

“Politicians meant to slow down the rapid rise in home value that we are seeing across the country.” he said. “In the long run, this really makes it easier for new home buyers to enter. [so] maybe you could call it neutral. “

Neil Pettit and Amanda Garant were hunting for a house during the pandemic, and they are amazed at how much people are willing to pay for a house in Windsor, Ontario. (Presented by Amanda Garant)

This is, of course, Neil Pettit’s point of view on this issue. Together with his fiancée Amanda Garant Pettit is looking for a house in Windsor, Ontario, where they live. But they are currently sitting on the sidelines, having lost several bidding wars, despite bidding well above the asking price each time.

“We are losing bids for $ 100,000,” he said in an interview. “I mean, there is no way.”

They both have high incomes and have amassed a decent down payment, which is why they stated that the new stress test is unlikely to affect them. Nevertheless, they are happy with the government’s intervention.

“You may not be in a home you can afford when interest rates are raised,” Pettit said. “So I think, from my point of view, it makes sense for the government to pull that lever a little.”

Although the couple still wants to buy, they are in no rush to do so. And after hectic house hunting and bad luck, they are sure they will not spill through them.

“We are very careful when we tried to make sure this is within our budget,” Pettit said. “Not the budget we could afford.”


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