What is the mortgage stress test and how is it changing?

The Liberals’ fall economic statement includes a new “Canada Mortgage Charter” with a new set of rules for federally regulated mortgage lenders. One of the changes will be a slight modification to the current “stress test” regime.

What’s the stress test?

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Federally regulated lenders (such as big banks) are required to ensure that potential borrowers could afford their mortgage if rates were to be either 5.25 per cent (a number set in June of 2021) or two per cent higher than they are currently. (Since rates have risen to between six and seven per cent in recent months, that 5.25 figure is essentially moot.)

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So if your mortgage were to have an interest rate of seven per cent, you’d need to be able to afford payments even if it went to nine per cent. As things stand, you need to retake the stress test if you switch to a mortgage with a new provider, but not if you stay with your current provider.

What if you fail the stress test?

If you can’t pass the stress test based on your income, you can’t get a mortgage from a federally regulated lender. You may still be able to get a loan from a private mortgage lender, however.

What’s the change?

The update will remove the stress test requirement for all mortgage renewals, including in cases where someone is switching lenders.

How does that make things different for borrowers?

Currently, if you’re worried about not being able to pass the stress test, you may feel pressure to stay with your existing lender, even if they don’t have the most competitive rates.

“They’re going to up your rate because you can’t go anywhere else,” says Dan Eisner, founder and CEO of True North Mortgage. “That’s a real fear, especially with the rates much higher.”

Is it really a big deal?

Probably not, provided you’re in decent fiscal shape and/or have paid down a significant part of your principal, but it does still make it less of a hassle to shop around for new rates.