The mortgage stress test is an important tool for ensuring that responsible lending practices are followed in Canada. It is designed to help protect borrowers from taking on mortgages that they cannot afford, and to protect lenders from taking on too much risk when lending money. This article will provide an overview of the mortgage stress test and how it works in Canada.
The mortgage stress test is a tool used by lenders to determine if a borrower can afford to repay a mortgage loan. It is based on two criteria: the borrower’s gross income and their total debt service ratio (TDSR). The gross income is the amount of income earned before taxes, while the TDSR is the ratio of the total monthly debt payments (including the mortgage) to the gross monthly income.
In Canada, the mortgage stress test is applied to all borrowers who are applying for a high-ratio mortgage (defined as a mortgage with a loan-to-value ratio greater than 80%). The stress test requires lenders to qualify borrowers at a higher rate than the rate being offered on the mortgage. For example, if the mortgage rate being offered is 3.2%, the lender must qualify the borrower at a rate of 4.89%. This helps to ensure that borrowers are able to afford their mortgage even if interest rates were to increase in the future.
The mortgage stress test has been in place in Canada since January 2018. Since then, it has been updated several times to ensure lenders are following responsible lending practices. For example, in 2021, the stress test was adjusted to provide more flexibility for borrowers with a down payment of at least 20%, and the stress test rate was reduced from 4.89% to 4.79%.
The mortgage stress test is an important tool for promoting responsible lending in Canada. It helps to protect borrowers from taking on mortgages that they cannot afford, and it helps to protect lenders from taking on too much risk. By understanding the mortgage stress test and how it works, borrowers and lenders can both benefit from a safe and secure lending environment in Canada.