– The so-called “stress test” for those seeking residential mortgages came
into force on January 1 this year. It is a federal government-mandated
requirement issued by the Office of the Superintendent of Financial
Institutions, so there’s no escape. Anyone borrowing from a lender subject
to federal regulation (and that includes just about every financial
institution in Canada) will have to pass the OSFI Mortgage Stress Test in
order to be approved for a mortgage. And note, this now applies to all
borrowers, including those making down payments of 20% or more, who
typically don’t need mortgage insurance.
Applied to the loan application, the stress test will look at such things
as how much you’ll be able to afford with your current debt-to-income
ratio, and whether you’d be able to continue making payments if interest
rates rise or you lose your job. But the kicker is that even if you qualify
a mortgage at a current contracted rate today, you’d still have to qualify
for a mortgage at an even higher rate, which is calculated as your current
rate plus two percentage points, or the average posted 5-year bank rate,
whichever is higher.
So if you have currently contracted for a standard bank-offered mortgage
with a 5-year fixed rate of, say, 3.29%, you’d still have to first pass the
stress test to qualify for the same mortgage at a 5.29% rate, or the 5-year
posted bank rate, currently at 5.14%, whichever is higher. The
stress test has the effect of cutting your borrowing capacity
substantially. If you don’t pass the stress test at the higher rates, you
won’t qualify for the mortgage. Most at risk are those who have stretched
their budgets to the limit in seeking the kind of house the want. For those
in this position, the result is that you may be forced to revise your
expectations and look for a lower-priced home.
There are a few other principles to keep in mind when wading into the
First off, make the biggest down payment you can. At the very least try to
match or exceed the 20% threshold beyond which mortgage insurance isn’t
necessary. You’re more likely to pass the new stress test rules. Mortgages
for more than 80% of the purchase price must be insured, and the insurance
premium is added to the monthly payment.
Next, always negotiate for the lowest interest rate possible. It’s even
possible to bargain with the big banks if you are a good risk and have a
sizable down payment. Consider variable rate mortgages, which typically
have posted rates one half percentage point lower than fixed-rate
mortgages, only if you have a monthly cash-flow cushion to withstand a
sudden rate increase.
Try to reduce the amortization period as much as possible. Yes, the longer
the amortization, the lower your monthly payments, but the higher the total
interest paid will be. Cut your amortization, even it’s only by a year to
begin with. And keep reducing it at the end of every term when it comes
time to renew, while maintaining or increasing your monthly payment.
Take advantage of prepayment privileges. If you have the ability to pay off
a lump sum of your principal amount without penalty every year, do so! It
reduces your principal amount immediately, and your interest costs shrink
dramatically over time. Also, make weekly or bi-weekly payments instead of
monthly payments. This can also add up to big interest savings over time.
The mortgage market can get complicated, and the new stress test rules have
added another layer of anxiety to the mix. To avoid surprises,
disappointments, and additional pressure at the lender’s office, check with
your financial advisor before you sign on the dotted line. They’ll be able
to give you a precise idea of what you can afford, whether you’ll pass the
stress test, and how much you’ll be able to borrow.
Robyn Thompson, CFP, CIM, FCSI, is the founder of
Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management
for high net worth individuals and families. She is also listed as a
MoneySense Approved Financial Advisor. Contact her directly by phone at 416-828-7159, or by email at
for a confidential planning consultation.
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