As a prospective homebuyer in Toronto, you may have heard of the stress test and its impact on your mortgage application.

What is the Mortgage Stress Test?

The stress test, also known as the mortgage qualification rate (MQR), is a measure put in place by the Office of the Superintendent of Financial Institutions (OSFI) to ensure that borrowers can still afford their mortgage payments if interest rates were to rise.

In simple terms, the stress test requires borrowers to qualify for a mortgage at a rate that is higher than the rate they are being offered. For example, if you are applying for a mortgage with a 3% interest rate, the stress test requires you to qualify at a rate of 5.25% or the rate offered by your lender plus 2% – whichever is higher. This means that you must prove that you can afford the mortgage payments at a 5.25% interest rate.

With today’s higher rates, if you are applying for a mortgage with a 4.5% interest rate, the stress test requires you to qualify at a rate of 6.50%

Who Does the Mortgage Stress Test Apply To?

The stress test applies to all borrowers, whether they are first-time buyers or repeat buyers. It also applies to all types of mortgages, including fixed-rate and variable-rate mortgages. The stress test rate is currently set at 5.25% for insured mortgages (those with a down payment of less than 20%) and 4.79% for uninsured mortgages (those with a down payment of 20% or more).

The stress test is not only a requirement for mortgage approval, but also a way to ensure that borrowers are not over-extending themselves financially. By qualifying at a higher interest rate, borrowers are more likely to be able to afford their mortgage payments if interest rates were to rise in the future.

How Does the Mortgage Stress Test Affect Your Mortgage Application?

For one, it can decrease the amount of mortgage that you can qualify for. Let’s say you have a household income of $100,000 and no other debts. Under the old rules, you would have qualified for a mortgage of up to $500,000. Under the stress test, however, you would only qualify for a mortgage of up to $425,000.

This can have a significant impact on your purchasing power and may mean that you need to adjust your home-buying budget. It’s important to keep in mind that the stress test is just one factor that lenders consider when assessing your mortgage application. Other factors such as your credit score, employment history, and debt-to-income ratio also play a role.

How to Reduce the Mortgage Stress Test Impact

One way to potentially mitigate the impact of the stress test is to put down a larger down payment. As mentioned earlier, the stress test rate for uninsured mortgages (those with a down payment of 20% or more) is lower at 4.79%. This means that if you can afford a larger down payment, you may be able to qualify for a higher mortgage amount.

Is Mortgage Refinancing Stress Tested?

It’s also worth noting that the stress test applies to refinancing as well. This means that if you are looking to refinance your current mortgage, you will need to qualify at the stress test rate.

In conclusion, the stress test is a measure put in place by the OSFI to ensure that borrowers can afford their mortgage payments if interest rates were to rise. It can have a significant impact on your mortgage application and purchasing power.

It’s important to to work with a mortgage broker or lender to understand the stress test and how it affects your specific situation. They can also help you explore different mortgage options and find a solution that works for you. Additionally, it’s important to consider your long-term financial goals and make sure that the mortgage you choose aligns with those goals.

It’s also important to keep in mind that the stress test is just one factor that lenders consider when assessing your mortgage application. Other factors such as your credit score, employment history, and debt-to-income ratio also play a role. 

By keeping these factors in check and working with a mortgage professional, you can increase your chances of passing the stress test and getting approved for a mortgage.