July 28, 2021

CMHC Mortgage Stress Test: Everything You Need to Know

Canada Mortgage and Housing Corporation or CMHC has increased the mortgage stress test qualifying rate from 4.79% to 5.25%, effective June 1, 2021.

If you are wondering whether or not this change applies to you and, if it does, how much your monthly payment will be now, then read on as we break down the nitty-gritty on the new CMHC mortgage stress test rate.

What is the CMHC stress test?

CMHC mortgage stress test is simply a test conducted by your mortgage lender to check if you would still be able to make your mortgage payments should interest rates increase in the future.

Originally launched in 2017, the CMHC mortgage stress test was designed to cool down a much overheated market and create a minimum threshold that anyone applying for a home loan in Canada has to meet.

It does not mean you will be charged at the increased rate right now or make your loan more expensive, but rather the mortgage stress test ensures that you will not be put into a bad financial situation 5-years down the road.

Canada’s mortgage stress test 2021

Canada’s mortgage stress test 2021

Canada’s mortgage stress test rules changed as of June 1, 2021. The new stress test rates are approved at the higher of the following qualifying rates:

  • your interest rate + 2%
  • 5.25%

The previous qualification rate was higher than the benchmark rate (4.79%) and the borrower’s mortgage rate.

What are the rules?

The Office of the Superintendent of Financial Institutions (OSFI) has implemented new rules on how to qualify for a CMHC insured mortgage, along with uninsured mortgages.

New qualifying rate

Beginning June 1, 2021, borrowers applying for an insured mortgage will undergo the mortgage stress test at the new qualifying rate of either their interest rate + 2% or 5.25%, whichever is higher.

Debt-to-income (DTI) ratio

Aside from subjecting you to the new mortgage stress test, lenders will take a look at your DTI ratio, which is composed of your gross debt service (GDS) and total debt service (TDS) ratios.

Homebuyers applying for a new insured mortgage will need to have the following:

  • GDS ratio = 35%
  • TDS ratio = 42%

The GDS ratio is the relationship between your gross income and the total mortgage payment, property taxes, and other fees (such as condo fees). These costs should not take more than 35% of your pre-tax income.

Meanwhile, the TDS ratio is the GDS and other outstanding debts you may have. These include car loans, student loans, and/or credit card/line balances. The overall total of your TDS should not exceed 42% of your income.

For example, if your annual household income is $150,000, your GDS should not be more than $52,500 and your TDS should not be more than $63,000.

Credit score

To apply for an insured mortgage, you or your co-borrower will need to have a credit score of at least 680.

How is the mortgage stress test calculated?

How is the mortgage stress test calculated?

The mortgage stress test is calculated by determining how much your mortgage payments would be at the qualifying rate, whichever is higher than 5.25% or your current interest rate + 2%.

Your mortgage lender will calculate your GDS and TDS ratios to determine if your income can sufficiently cover the new mortgage payments based on the new CMHC stress rates and if your debt is low enough to add another monthly payment.

This means your purchasing power will be reduced and so will the amount of mortgage you can qualify for. However, this increase in fact serves to protect homebuyers from rising interest rates and prevent foreclosures in the future.

Can I pass the mortgage stress test?

To pass the stress test, you must still be able to afford your mortgage payments if your interest rate is the qualifying rate.

If you’d like to know how to pass the mortgage stress test, first check your DTI ratio using the CMHC homebuying calculators to determine how much your mortgage payment could be, how much you can afford, and more.

Is the mortgage stress test going away?

Currently, housing loan interest rates are at an all-time low as a result of the pandemic. However, there’s no guarantee that will be the case in the near future.

These new rules currently only apply to uninsured mortgages, but may soon affect insured mortgages as well. 

The OSFI said it will review the qualifying rates annually. Therefore, it looks like the mortgage stress test is not going away anytime soon.

Why does it exist?

All federally regulated lenders are required to conduct a stress test. This includes all banks in Canada and all federally incorporated or registered trust and loan companies.

If you are buying a home for the first time and applying for a home loan from one of the big banks, then you will be subjected to the CMHC mortgage stress test.

CMHC introduced the mortgage stress test in 2017 at a rate of 4.79% to help cool the demand in the housing market.

This year’s changes were created to cushion any economic impacts brought on by the pandemic and the resulting low mortgage interest rates.

These efforts are expected to ensure that homebuyers with insured mortgages would not have a hard time keeping up with their mortgage payments and default when interest rates go up eventually.

As they say, when you’re done, there’s nowhere else to go but up. And the interest rates will go up, maybe not next year, but it helps to know you’re prepared in any case.

The mortgage stress test is done whenever you:

  • apply for a new mortgage
  • switch lenders
  • refinance your mortgage

What if I can’t pass the stress test?

What if I can’t pass the stress test

If you can’t pass the new mortgage stress test, you will not be eligible for a mortgage at any of the big banks and other federally regulated lenders.

However, you may consider alternative lenders, such as private mortgage companies, which are not required to conduct a stress test.

Just remember that alternative lenders’ mortgage rates are typically much higher than those of traditional banks.

Using alternative lenders to avoid the mortgage stress test

Using alternative lenders provide different kinds of financing, which doesn’t completely fall within the federally regulated structure. This includes:

  • first mortgage
  • home equity loan
  • home equity line of credit (HELOC)
  • refinancing
  • debt consolidation

As they are not regulated by the government, alternative lenders can be more flexible than traditional banks in terms of credit scores and qualifying income.

However, this also means they generally charge higher interest rates than most federally regulated lenders.

Then vs. now mortgage stress test approval calculations

Here is an example of what you would have been approved for then vs. now.

Below is a comparison of the monthly payments a borrower with the following income and expenses can expect.

  • Annual household income: $150,000
  • Average monthly household expenses: $2,500
  • 5% down payment: $25,000
A borrower’s purchasing power at the previous ratesNew qualifying rates
Mortgage amount: $500,000Monthly mortgage payment: $2,814.36Mortgage amount: $486,473Monthly mortgage payment: $2,943.84

Previously, a borrower with an annual household income of $150,000 and average monthly household expenses of $2,500 can be approved for a $500,000 mortgage.

With the new qualifying rate, the same borrower could be approved for a home priced at a maximum of $486,473, which is $13,527 less than the previous rate’s approval amount.

The borrower would have money left over of $3,384 at the previous qualifying rate of 4.79% and $3,341 at the new qualifying rate of 5.25% that can go towards the new mortgage payments.

The mortgage payment at the new qualifying rate (5.25%) is higher by $129.48 than that at the previous qualifying rate (4.79%).We’ve pretty much covered everything you need to know about the new mortgage stress test. If there’s anything else you’d like to clarify or if you’re ready to buy a home, contact your local St. Paul or Bonnyville CENTURY 21 real estate agent and we’ll gladly walk you through the whole process.

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