A New Stress: What the new mortgage stress test really means

There’s a reason it’s called a mortgage stress test. And as of June 1, it’s about to get a little more stressful.

That’s when homebuyers applying for an uninsured mortgage — typically, those with at least 20 per cent down — will need to show they can withstand a contract with an interest rate of 5.25 per cent or two per cent more than their actual mortgage rate, depending which is higher. That’s up from the current qualifying rate of 4.79 per cent.

Homeowners looking to renew their mortgage, tap into the equity in their home by refinancing to take on additional debt, or expand their real estate portfolio by purchasing additional property will also need to prove they can handle can navigate rising interest rates, especially if they’re forgoing mortgage insurance.

What does the new mortgage stress test rate mean?

Put in context, the new qualifying rate of 5.25 per cent is about four times the average mortgage interest rate at the moment. It was determined based on the average five-year rate posted by Canada’s Top 5 banks.

The change is meant to insulate homeowners when the ultra-low interest rates ushered in by the economic travails of the pandemic start to return to normal, pre-pandemic levels.

How to avoid the stress of the new mortgage stress test