Mortgage Stress Test - What you need to know?
TOPIC
Mortgage Types
What is the Mortgage Stress Test?
The Stress Test was introduced in 2018 by the Office of the Superintendent of Financial Institutions (OFSI). The purpose of the stress test is to ensure that a borrower can afford the mortgage even under special circumstances. For example, if you lost your job, if interest rose significantly, or if you take on new debts, can you still afford to make the mortgage payments?
Since 2018, borrowers have been qualifying at a higher interest rate than the interest rate they are actually paying. With the heated housing market, low-interest rates, and higher % of household debt, all due to COVID-19, OSFI is stepping in to increase the mortgage stress test from 4.79% to 5.25% effective June 1st. Their hope is that their decision will cool down the housing market, by making it more difficult for borrowers to borrow money.
AUTHOR
Yiming Han
Example
When you get a mortgage, you will have a Contract Rate (the actual interest rate you are paying), but this will not be the interest rate that the bank qualifies you at, they have to base the mortgage approval based on the Mortgage Stress Test. The table below shows how this works in real life.
Even though the client above is receiving a contract rate of 1.30%, they are qualifying at mortgage payments on an interest rate of 5.25%.