In 2016 our federal government implemented a policy that was met with mixed reviews. Called the “stress test,” the policy required borrowers to qualify for a mortgage at a rate of 5.25% or 2% higher than the rate they were applying for. (Whichever was greater.) When this policy was introduced, the Bank of Canada lending rate was 1.25%, meaning a borrower would be required to qualify for a mortgage at 5.25%. At the height of the mortgage market, a borrower must qualify at around 9% for a mortgage. This removed many, if not most, of the Buyers out of the home purchase market. 

Before the new policy of the stress test, couples with a family income of $200,000 qualified for a mortgage of $1,400,000. (At a 2% rate) Once the new policy was introduced the mortgage they could qualify dropped to $1,000,000 and when the rates peaked at 7% their mortgage amount dropped to $725,000. It is understandable how this policy negatively impacted borrowers. 

However, changes are coming to the stress test. Let’s take a look at the effects of the new changes.

The current changes discussed with the stress test place more “stress” on the lender than the borrower. The idea is that instead of discounting a borrower’s ability to pay based on a “hypothetical guess” that the mortgage rates would increase, the new rules would create guardrails limiting the lender’s ability to lend out high-risk mortgages. The policy would limit a lender to lending out only 15% of their quarterly loans to borrowers who need mortgages that exceed 450% of their combined yearly salaries. Using the above family as an example, here is how the new policies will impact them.

Current stress test maximum mortgage – $1,000,000.

New stress test maximum mortgage – $900,000

The reasoning behind both the original and new stress test policies was to “protect” borrowers against rising rates. I believe this reasoning came from a good place; however, after 10 consecutive rate increases in 2022 and over 1 million mortgages renewing in 2025, some at rates more than 5% higher than they were renewing from, the default rate currently is less than 1%. A question is, “Was the market more affected by the stress test implementation than the increasing mortgage rates”? 

Homeownership rates in Canada are enjoyed by over 66% of all people, and the implementation of the stress test has added to young homeowners opting to rent and not buy. 

It is time for our government to reduce the barriers of home ownership and allow hard-working people, both young and old, to start building equity in their homes.

If you have questions about buying or selling a property, I can be reached at linday@buyselllove.ca or 905-743-5555.

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