As if getting approved for a mortgage wasn’t challenging enough given today’s sky-high housing prices, the rules of the mortgage stress test make it even harder. This mortgage stress test requires borrowers to prove that they can still make their payments at an interest rate that’s higher than the rate their lender offers.
But can these rules also impact your renewal plans? Is there such a thing as a mortgage renewal stress test?
Key Points
- Uninsured mortgages are required to pass the stress test when renewing their mortgage with a new lender. Insured mortgages are exempt from this requirement.
- A mortgage renewal stress test is not required if you’re renewing your mortgage with your current lender.
- The test requires borrowers to qualify for a mortgage based on a minimum qualifying rate, which is currently 5.25% or the loan contract rate plus 2%, whichever is greater.
- To avoid the mortgage stress test, consider renewing your mortgage with an alternative lender that isn’t required to stress test borrowers.
Does The Mortgage Stress Test Apply To Mortgage Renewals?
If your mortgage is up for renewal soon, you may have to re-qualify and undergo the stress test again. This depends on whether your mortgage is insured or uninsured. It also depends on whether you’re sticking with your current lender or making a switch.
If you choose to stay with your current lender, you won’t have to go through the mortgage stress test. But if you want to switch lenders when you renew and your mortgage is uninsured, OSFI requires that your new lender apply the stress test. That means you’ll have to re-qualify at either 5.25% or the rate your lender offers plus 2% (whichever is greater).
What About Insured Mortgages?
Insured borrowers are exempt from having to undergo the mortgage stress test when they switch lenders at renewal. This is because the mortgage insurer assumes the borrower’s credit risk. Sagen and Canada Guaranty — Canada’s two private mortgage default insurance providers — recently announced that high-ratio borrowers do not have to be stress tested when they renew with a new lender.
However, this is conditional upon the following:
- The loan amount has not increased
- The original amortization timeline has not changed
| What Is The Mortgage Stress Test? The mortgage stress test was first introduced in 2016 by the Office of the Superintendent of Financial Institutions (OSFI). The mortgage stress test is meant to determine whether borrowers will be able to keep up with their mortgage payments if interest rates increase in the near future.All federally regulated Canadian lenders have to make sure that the conventional home loans they issue are qualified using the Bank of Canada’s 5-year benchmark rate (currently at 5.25%) or at the current contracted rate plus 2%, whichever is higher. |
How Will The Stress Test Affect Borrowers Looking To Renew In 2024?
Not only does the stress test affect new mortgages, but it also impacts mortgage renewals. If you need to renew your mortgage this year, you will have to qualify for your mortgage based on the higher stress-test rates instead of your existing mortgage rate stipulated on your pre-approval contract.
Let’s say you have a 5-year, fixed-rate mortgage of $100,000 left to pay on a $400,000 home you purchased, with a 4.25% rate. If your renewal date is approaching, and you’re offered a rate of 6.79%, you would need to qualify for a rate of 8.79% (6.79% + 2%) because of the stress test.
In other words, your lender will need to make sure that you can handle paying back that remaining $100,000 based on 8.79%. Plus, you’ll have to budget for much higher mortgage payments due to the rate hike.
| What Is The Purpose Of The Stress Test? The purpose of the mortgage stress test is to assess the risk of home loans for borrowers. Basically, the stress test will help lenders to determine each borrower’s ability to handle making their monthly mortgage payments in full and on time each month, especially as the interest rate increases. |
Can I Avoid The Mortgage Stress Test When I Renew?
As mentioned, federally regulated lenders are required to stress test borrowers with uninsured mortgages when they switch lenders.
However, provincially regulated lenders, like most credit unions and alternative lenders, are not required to follow these stress test rules. These lenders can use their discretion whether or not to include the test as part of the renewal process.
How Will The Stress Test Affect Borrowing Power?
This stress test, which all borrowers are now subject to, can diminish borrowing power.
Borrowing capacity is basically a borrower’s ability to service their mortgage loans provided by their lenders and is highly influenced by debt service ratios, including the Gross Debt Service (GDS) and Total Debt Service (TDS) ratios. An increase in any one of these ratios will inevitably reduce borrowing capacity.
- Gross Debt Service (GDS) ratio. This is a percentage of your gross monthly income used to pay for all monthly housing costs. It’s calculated by dividing your housing costs by your income. Your GDS should be no higher than 39%.
- Total Debt Service (TDS) ratio. This is a percentage of your gross monthly income used to pay for all housing costs, plus all other debt obligations. It’s calculated by dividing all your debts (including your housing costs) by your income. Your TDS should be no higher than 44%.
How Rising Rates Make The Mortgage Renewal Stress Test More Difficult To Pass
Today, rates are roughly double what they were in early 2021, with the 5-year fixed-rate teetering near the 7% mark.
These recent rate spikes show how much of an effect that they can have on mortgage affordability. Higher rates have made borrowing costs more expensive and the mortgage stress test much more difficult to pass.
As mentioned earlier, the minimum qualifying rate is currently 5.25% or the contract rate plus 2%. But the former benchmark rate is rarely a factor these days. This is because it’s lower than most contract rates offered by lenders. If lenders are offering 5-year fixed-rates at 6.84%, for instance, borrowers would have to qualify at 8.84% (6.84% + 2%), since this is the higher of the two.
According to the National Bank of Canada, the mortgage stress test decreased buyer power by roughly 22% when it first came out for uninsured borrowers in 2018.
As the mortgage stress test becomes more difficult to pass, it reduces the loan amount borrowers can qualify for. Or, borrowers will have to save up for a larger down payment. This decreases borrowing power for Canadians in the market to buy a home.
Other Effects Of The Stress Test Rules On Borrowers
Not only can the mortgage stress test affect your plans for renewing your mortgage, but it can also affect you in other ways:
How The Stress Test Could Affect Debt Consolidation Plans
The stress test rule could also make it tougher for current homeowners who depend on their home equity to consolidate their high-interest debt. Just as you would with a new mortgage, you’ll need to pass the mortgage stress test to qualify for a home equity loan or home equity line of credit (HELOC) at a bank or other federally-regulated financial institution.
For homeowners with a ton of high-interest debt, the urgency to consolidate may be more pressing. If you can’t qualify for a home equity loan because of the stress test, consider applying with an alternative lender. Several alternative lenders are available, including Alpine Credits, that provide home equity loans based on the equity in your home and not on your credit.
Additional Reading
Final Thoughts
With the rules surrounding mortgage stress tests impacting all Canadian borrowers, it’s important to take steps to protect yourself. Take the time to understand how much you qualify for under the stress test rules before house hunting. Speak with an experienced mortgage specialist to see how your housing affordability will be affected.
Frequently Asked Questions
Will the OFSI drop the stress test requirements?
What was the minimum qualifying rate before the OSFI increased it to 5.25% in 2021?
Can I avoid going through the mortgage stress test when I renew with a different lender if my mortgage is insured?
What happens if I fail the mortgage stress test?
Does the mortgage stress test apply to both fixed- and variable-rate mortgages?
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.
