Mortgage stress test
There has been some information in the media lately about the mortgage stress test. The stress test has not changed, but the interest rate has changed which is having serious repercussions on the percentages used for the stress test.
In May of 2018, policy makers instituted the Stress Test for mortgage qualifying with the intention to ensure that homeowners would be able to keep up with increased payments, as interest rates increased. To pass the stress test, you must be able to afford your payments at a “qualifying rate”. The stress test only applies to new mortgages, refinancing or switching lenders – mortgage renewals with the same lender are exempt.
At the onset, the Stress Test qualifying rate was 5.39%. It dropped slightly to 5.34% along the way, and as of today (June 24, 2022), the benchmark is sitting at 5.25% or 2% over contract rate.
Rising interest rates
Interest rates have started to rise with inflation, and we are experiencing some unusual discrepancies between stress tests for fixed vs variable rates. The qualifying rate on mortgages is based on either the benchmark rate of 5.25% or the rate offered by your lender plus 2% – whichever is higher.
Your mortgage professional will have the experience and expertise to walk you through the options to maximize your borrowing power.
An example of how the stress test impacts borrowing power
A first-time buyer earns $75,000/year, has a $400 vehicle payment and owes $4,000 on a credit card. The buyer has 5% down payment. Based on the current rates and the qualifying rate for the stress test, there is a significant difference in borrowing power for the client.
| Mortgage Type | Rate | Stress Test | Mortgage amount |
| Variable | 2.8% | 5.25% | $420,000 |
| Fixed | 4.74% | 6.74% | $360,000 |
As a result of the stress test, some clients will be a disadvantage if they want to have a fixed mortgage rate because it is creating divergent qualifying rates. The stress test may be taking away product choices for homeowners and forcing them into a scenario they might not prefer.
This is where we come in as mortgage professionals, we are here to help every homeowner with their best options for lenders and rates. Our brokers strive to stand out from the everyday mortgage lender and bank. Much more than mortgage professionals, we are always looking for ways to go above and beyond for our clients; offering ongoing strategies, programs and incentives to help ensure your home ownership goals and financial success.
Do not hesitate to call and our brokers can help you with your options.
For further reading:
Increased stress test coming soon?
How the mortgage stress test is impacting qualification amounts
