An excellent explanation of the Stress Test and why it’s important from our friends at Bridgewater Bank.
Look no further than the recent interest rate hikes to understand why the mortgage stress test is so important. It protects the clients and the lenders if interest rates rise, and it’s in everyone’s best interest for the homeowner to afford their mortgage payments.
We know mortgage brokers are between a rock and a hard place—you want to help your clients get the home they want, but you also want to ensure they can truly afford it. So, how do you have that conversation with your clients? Be straightforward.
WHAT EXACTLY IS THE MORTGAGE STRESS TEST?
The simple answer is that a mortgage stress test in Canada assesses whether a person applying for a new mortgage could still afford it if interest rates increase.
The stress test calculation is the higher of your interest rate plus 2% or the benchmark stress test rate of 5.25% (as of June 1, 2022), also referred to as the Bank of Canada’s qualifying rate. The Office of the Superintendent of Financial Institutions (OSFI) Guideline B-20 sets out expectations for residential mortgage underwriting in all federally-regulated financial institutions.
HOW DOES THE STRESS TEST HELP YOUR CLIENTS?
It comes down to this—it’s better to meet the stress test now than suffer the stress of losing their home later. Many Canadians carry debt, and as the cost of living rises, income is not always keeping pace.
All federally-regulated lenders use the B-20 stress test for new mortgages, alternative mortgages and mortgage renewals with a new lender (but are not applicable if they are renewing with their current lender).
B-20 stress test rules were designed to help guide your clients into a home they can afford. Simply put, the stress test ensures an additional 2% buffer to guard against inflation, and in 2022, we have seen this in real-life scenarios.
“Sound mortgage underwriting is critical for maintaining the stability of the financial system. This is especially true now when changing conditions such as potentially rising interest rates could make repaying mortgages more difficult in the future.”
– Peter Routledge, Superintendent, OSFI