Feeling stressed by the mortgage stress test? I have some good news. The stress test rate has fallen. This is the first change in a year and the first time the rate has fallen in three years. The stress test rate, also known as the benchmark rate, has dropped from 5.34 percent to 5.19 percent.
Let’s take a closer look at why the stress test rate matters and what it means for homebuyers.
Why does the stress test rate matter?
The stress test rate is what federally regulated lenders use to calculate your hypothetical mortgage payments for qualification purposes. In order to qualify for a mortgage with a prime lender, you must be able to prove that you can afford the payment (i.e. your Gross Debt Service and Total Debt Service Ratios must be within the lender’s standards, a maximum of 39 percent and 44 percent respectively for most lenders).
You may be thinking, 5.19 percent, nobody with good credit is paying 5.19 percent on their mortgage and you’d be right. The stress test rate is higher by design to make sure you can afford higher mortgage rates (and higher mortgage payments) if they arrive in the future, say, when your mortgage comes up for renewal.
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What took the stress test rate so long to change?
If you follow mortgages, you probably read a story or two about 5-year fixed rate mortgages hitting their lowest levels since 2017. Based on that alone you’d think that the stress test rate would fall, but it’s not so easy.
The stress test rate is based on the posted rates of the "Big 6" banks. Even though virtually nobody pays the inflated posted rates, as you can see it has a big impact on the rate used to qualify you for a mortgage. Without getting too technical, the stress test rate is the mode average of the posted 5-year fixed rates of the big 6 banks.
Although there hasn’t been a change with the posted rates because of the obscure way the Bank of Canada calculates the stress test rate based on the total Canadian assets of the big banks, we saw our first lowering of the stress test rate in three years.
I’m a homebuyer, what does it mean for me?
I wish I could say the change in the stress test rate is going to have a huge impact in your home buying power, but I’d be lying if I did. That being said it will help a little! With the stress test rate now at 5.19 percent, you’ll see your home buying power increase by slightly more than 1 percent.
Although it’s not a huge impact, every little bit helps. The stress test rate is heading in the right direction, down, which is good news for those looking to snag a deal in the real estate market during the summer or those looking to buy in the fall.
Check your free credit score with Borrowell and see the best mortgages, personalized to your credit profile.
About the Author Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path To Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedIn, Twitter, Facebook and Instagram.
Sean Cooper is the bestselling author of the book, Burn Your Mortgage. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense.