What is a 'Mortgage Stress Test'?
By Alterna Team
December 20, 2021

Becoming a homeowner is exciting. And purchasing a home is one of the most significant investments for Canadians. While housing prices in Canada have increased, interest rates have remained low. To protect borrowers in case interest rates rise, the government implemented a mortgage stress test. Thus, it is important to understand the stress test, who is affected, what it means for you.

The Canadian mortgage stress test is a set of guidelines from Canada’s top banking regulator. These guidelines took effect on January 1, 2018. The guidelines outline a process to determine whether a borrower can continue to afford their mortgage payments if interest rates rise. Borrowers are ‘stress tested’ at the Bank of Canada’s posted 5-year mortgage benchmark rate, or at two percent higher than the rate being offered by their financial institution – whichever is higher. These guidelines affect first-time homebuyers, homeowners looking to switch their mortgage and insured/uninsured borrowers. This does not apply if you are just renewing your mortgage with your current lender.

So how does a financial institution calculate the loan amount you will get? They add up all housing costs and debt payments you have or will have. The housing costs include the mortgage payment at the stress test interest rate, condo fees if any, utilities (heat) and property taxes. The debt payments would include car payments, personal loans, student loans, credit cards, lines of credit, and any other debt you may have. The sum of these monthly expenses needs to be around 42% of your income before taxes (gross income). Using the stress test could mean approval for a loan amount 20% lower vs. not using the stress test.

Click here for the changes that came into effect on June 1, 2021.

Buying a home should be exciting, not intimidating, so don’t go at it alone. Speak to one of our Alterna Banking Advisors about our range of Mortgage Solutions. We have open and closed mortgages, variable and fixed rates, a combination of all and a multi-ownership mortgage.

For over 110 years, Alterna Savings has been The Good in Banking®

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Updated: February 2023