Since 2018, all home buyers in Canada must undergo a mortgage stress test, regardless of whether or not they have a 20% down payment saved up. This was a major change in Canadian mortgage rules, and there’s been more since then.

New rules were added to the stress test in 2021, by the Office of the Superintendent of Financial Institutions (OSFI) and the Department of Finance. These regulations were put in place to ease the borrowing burden of home buyers and ensure monthly payments can still be made if interest rates were to rise significantly.

Rising interest rates are on the minds of many home buyers right now, but the good news is the mortgage stress test is designed to help you prepare for changing rates in the short-term. 

Let’s unwrap what these Canadian mortgage rules mean for you, along with some examples to show you how it affects the size of the loan you can qualify for. 

A TIMELINE OF CHANGES TO CANADIAN MORTGAGE RULES

The mortgage stress test was first implemented by the Canadian government in 2016, It was done to help prevent foreign investment from overheating the Canadian housing market and to encourage responsible homeownership.   

At first, it was only for home buyers opting for less than 20% as a down payment or a term shorter than five years. Now, these rules were adjusted to apply to all new mortgage applications.

The most recent change came in June of 2021 with a new mortgage qualifying rate for all uninsured and insured mortgage applications. This rate is calculated using the benchmark (minimum) rate of 5.25% or the rate your lender can give you + 2%. The higher rate between the two is the one that needs to be used.

BENCHMARK QUALIFYING RATE (WITH AN EXAMPLE)

Using CMHC’s Affordability Calculator, if you have an annual income of $100,000, $1,500 in monthly expenses, and $50,000 set aside for a down payment on a five-year variable rate mortgage at 3%, you can afford approximately $472,614 for a home. 

Under the new rules, you’ll need to qualify at 5.25% and can now afford $385,617. That is a difference of close to $90,000 so this lower amount is the range of homes you should be looking for because you will be able to pass the stress test at this level.

PREPARING FOR THE LENDER’S RATE + 2%

Now, if the rate a lender offers you ends up being more than 5.25% with the 2% added to it, you will need to prepare to qualify for even less. Let’s say you’re offered 4.50% on a five-year fixed rate mortgage. The stress test will then be calculated based on 6.5% and the $385,617 maximum loan amount in the above example would now be $348, 586 using this rate.

This means you need to set your sights on a more affordable home. The good news is once you pass the stress test you don’t need to worry about it again, as long as you renew with the same lender.

OTHER CANADIAN MORTGAGE RULES TO KNOW

There were some other changes implemented since the major stress test adjustment in 2018. In July 2020, CMHC implemented changes applicable to high-ratio mortgages. In case you’re wondering, a high-ratio mortgage is one where the down payment amount is less than 20% of the purchase price – which means they will need mortgage insurance.

• Qualification Rate – the new rules lowers the amount of debt you can carry. As the applicant, you will be limited to 35% of your gross income that’s applicable to housing and can only borrow up to 42% (which includes other loans). The previous amounts were 39% and 44% respectively.
• Credit Score – the minimum credit score now required is 680, which is considered a good score. If it’s a partnership, then one of you must have a credit score of at least 680. The previous number was 600, which is considered a fair score.
• Down Payment – as a home buyer, you’re required to use your own money for the down payment. This means you can’t use unsecured loans or lines of credit, nor can you use a credit card to help fund your down payment. As mentioned, if your down payment is less than 20% of the purchase price, you are required to purchase mortgage insurance.

WHAT DOES THIS MEAN FOR CANADIAN HOME BUYERS? 

The mortgage stress test is put in place to make sure Canadians aren’t taking on more than they afford, but it also means they will qualify for a smaller mortgage because they’re being approved based on the higher rate.

First-time buyers will be most affected by these changes as they will have to save more, for longer. In the event they don’t qualify under the stress test, they will need to either save a larger down payment, purchase a smaller home, or seek a co-signer for their loan. Move-up buyers may also find themselves second-guessing their plans for another home. 

While the Canadian mortgage rules will make things a little tougher for Canadians looking to buy their first home, experts advise that having a good understanding of the new regulations combined with a solid mortgage pre-approval can reduce any stress or surprises. For more information, be sure to talk to your lender. 

Note: the information in this article was verified and accurate at the time of publication. As needed, we will update the numbers to keep this information as accurate as possible.

Originally published Nov 16, 2017; updated Dec 13, 2022

Author: Jeff S.

Proud father and husband. Loves music, Nine Inch Nails, UFC and inbound marketing.