Home Buying

How to Stress Test Your Mortgage

How to Stress Test Your Mortgage
Written by
  • nesto
| Jul 6, 2022
Reviewed, Aug 18, 2023

Table of contents

    In Canada, banks and other lenders use mortgage Stress Tests to see whether or not you could afford repayments if rates were to change. The government of Canada introduced mortgage stress testing as a way to protect lenders and borrowers alike from the fallout of sudden changes in rates that make repayments untenable. In this guide, we’ll break down the ins and outs of how you can stress test your mortgage with nesto.

    Key Takeaways

    • A stress test for mortgages is a way to determine how affordable repayments are in the event that interest rates rise
    • Lenders look at your income to housing expenditure ratio, and your income to debt ratio, when they’re examining your mortgage stress test results.
    • The current benchmark rate is 5.25%. When stress testing your mortgage, you use this rate, or your desired mortgage rate +2% (whichever is highest).
    • If a lender does not think you can make repayments at the stress-tested rate, you will likely not be approved for a mortgage at that amount.

    Are you a first-time buyer?

    What is a Stress Test?

    Stress testing allows you to see whether you would be able to afford your mortgage if your monthly payments were to go up. In financial terms, a stress test simply means testing something for worst-case scenarios. In the context of your mortgage, a mortgage stress test is a way to protect Canadians from borrowing too heavily against their home, by testing how much of an increase in their mortgage payment they could afford, before they are approved. 

    What is a Mortgage Stress Test in Canada?

    In Canada, mortgage stress tests are used to see whether you could afford your mortgage repayments if interest rates were to increase by a certain percentage. Given that interest rates can fluctuate and affect your mortgage repayments, lenders use mortgage stress testing as a prerequisite for qualification and to protect themselves from excess risk if you cannot repay your mortgage. 

    With interest rates expected to continue rising for the rest of the year and potentially into 2023, mortgage stress tests are important to understand if you’re looking to apply for a mortgage this year.

    How do I Calculate My Stress Test Mortgage Payment?

    The easiest way to calculate your mortgage stress test is to add 2% to advertized mortgage rate:

    • The Bank of Canada Benchmark Rate, currently 5.25%, or
    • Your mortgage interest rate + 2%

    For example, if your mortgage rate is nesto’s best 5-year variable rate of 5.50% (as of April 2023), you would calculate:

    5.50% + 2% = 7.50%

    Since the Bank of Canada’s benchmark rate of 5.25% is lower than 7.50%, you would use the higher 7.50% for the stress test rate.

    Then, simply input your stress test rate into our mortgage calculator to calculate your stress test monthly payment for your desired mortgage amount.

    If your monthly housing expenses are less than 39% of your monthly income, you pass the stress test for that mortgage amount.

    Mortgage Stress Test Changes in Canada

    As of June 1, 2021, all uninsured mortgages (where borrowers have a down payment of at least 20%) and insured mortgages (i.e. those with less than a 20% down payment) must be approved at the government’s benchmark rate of 5.25%, or the applicants mortgage rate +2% (whichever is highest).

    The only exceptions to these figures happens if you have a purchase and sale agreement dated prior to June 1st 2021, or if you are renewing an existing mortgage that is default insured. For an accepted offer dated prior to June 1st, you would be subject to the higher of the previous Stress Test rate of 4.79%, or your contract interest rate +2%. In the example of an insured mortgage being due for renewal, the qualifying rules would be based on the date that the insured amount was funded.

    Stress test 2.0, as it’s known, and its higher qualifying rate, significantly impacts homebuyers’ purchasing power, and reduces the amount of mortgage someone can qualify for by around 5 percent. The new stress test was introduced as a way to protect Canadian homeowners from borrowing too much against the value of their home, and accumulating untenable levels of debt.

    Here’s a breakdown of the government’s benchmark rate over the last 5 years.

    Government of Canada’s Benchmark Rate, 2017 – 2022

    Date Interest Rate Change
    October 25, 2017 4.99%
    January 17, 2018 5.14% + 0.15%
    May 9, 2018 5.34% +0.20%
    July 10, 2019 5.19% -0.15%
    March 18, 2020 5.04% -0.15%
    May 20, 2020 4.94% -0.10%
    August 12, 2020 4.79% -0.15%
    June 1, 2021 5.25%
    Source: Government of Canada

    Mortgage Stress Test Example

    Let’s say you’re looking to buy a semi-detached home in Calgary right now. In June of 2022, one of these properties would cost around $540,000, on average. Let’s assume you have 20% to put down up front (20% of $540,000 is $108,000), and you want to get approved for a 5-year variable rate of 3%, with a 25 year amortization period. 

    Your total mortgage amount would be $432,000, and your monthly payments would be $2,044.42, before stress testing. If you were to stress test these payments, you’d use the government’s benchmark rate of 5.25%, since it’s the highest of the two stress test figures (3 + 2 = 5, which is lower than 5.25). After stress testing, your new monthly payments would be $ 2,512.53. 

    How to Stress Test Your Mortgage

    To see if your mortgage will pass the stress test needed for approval, use our mortgage payment calculator to input your desired mortgage amount. Then, apply either the benchmark rate of 5.25%, or your mortgage rate plus an additional 2% (whichever of those two is highest.) This will give you your ‘stress tested’ monthly payment amount. 

    The question is, can you afford this figure? Officially, you cannot if this figure plus all your other housing costs (property tax, heat, condo maintenance fees) is more than 39% of your household’s gross income. You will not be approved for a mortgage that you cannot afford after stress testing it, if it means your household costs to income ratio is too high.

    Frequently Asked Questions

    How do I know if I passed my mortgage stress test?

    In Canada, when applying for a mortgage, lenders will look at two formulas: Gross Debt Servicing Ratio (GDS) and the Total Debt Servicing ratio (TDS). GDS measures how large a housing cost you have compared to your income, while TDS measures how much housing debt you would be taking on in addition to all your other debts, compared to your income. Generally, if your household’s gross annual income is eaten up by over 39% by housing expenses – notably when factoring in a stress-tested mortgage, you won’t pass the stress test. For TDS, all your debt repayments, like mortgage repayments at the stress-tested amount, credit card debt, and any other loans, must be less than 44% of your households gross annual income. These lenders may vary between lenders. You will know that you did not pass the stress test if your mortgage application is denied based on the results of it. 

    Do all mortgage lenders use the stress test?

    As of June 1, 2021, all uninsured mortgages (down payment above 20%) and insured mortgages (down payment below 20%) must be approved at the benchmark qualifying rate of 5.25% or their contract rate +2% (whichever is higher). However, if you decide not to go with a conventional lender, you may benefit for exceptions through an alternative lender, like a private institution or a non-federally regulated credit union. You can also think about saving for a higher down payment, or extending the amortization period on your loan, so that your monthly payments are lower to begin with, and may help you pass the stress test.

    Do you have to do a stress test to renew your mortgage?

    Not if you stay with your current lender. However, currently Canadian qualification guidelines require homeowners to re-qualify if they want to switch to a new lender when they renew. This means you will have to pass a new stress test as part of the mortgage process.

    Final Thoughts

    Stress testing is an important way lenders can assess whether or not an applicant will be able to pay their monthly payments if rates were to change. By simulating the impact that an increase in your mortgage repayments would have on your income to housing expenditure, and income to debt levels, stress testing is a way to protect both lenders and borrowers alike. For lenders, stress testing means they can de-risk their applicants by only allowing those with additional breathing room in their budget. For buyers, it means they won’t get in over their heads if rates go up. 

    If you’re looking to apply for a mortgage in Canada at the moment, nesto provide the best rates available, and we also lend directly. If you’ve tried out our mortgage affordability calculator and think you would pass the stress test at your chosen rate, get in touch now, and we’ll help you get things started.

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