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Mortgage stress test: The rules for Canadian homebuyers

Rear view of a young couple walking towards their new home

Buying a home is one of life’s biggest steps. And it’s a major financial responsibility, especially if you’re also carrying debt from your medical training.

Once you’ve decided that you’re going to buy, you need to determine what you can afford, the required down payment, mortgage basics and how to get mortgage pre-approval.

Over the past several years, the federal government has been tightening mortgage rules in an effort to limit how much debt Canadians take on. In June 2021, the government raised the minimum level for the mortgage stress test.

What is a mortgage stress test?

The mortgage stress test is a way of making sure borrowers will still be able to make their mortgage payments if interest rates climb higher. Even though interest rates may remain relatively low, the amount you are allowed to borrow now has decreased.

The stress test applies to both insured and uninsured mortgages. If you don’t have a down payment of at least 20% of the purchase price, you are required to buy mortgage default insurance, which could add 2.8% to 4.0% of your total mortgage amount, plus the sales tax (insured). If you have more than a 20% down payment, you don’t need to buy mortgage default insurance (uninsured).  

The stress test requires that you must be able to make your mortgage payments using an interest rate that is the greater of:

  • 5.25% or
  • your negotiated rate plus 2%.

You’ll qualify for less, but how much less?

To make this clearer, let’s look at this example:

Dr. Ellen Wise, a 32-year-old PGY-3, and her husband are ready to buy a home. Together, they have a current household income of $175,000 before tax. Thanks to family help, they have a down payment of $200,000.

At their bank, they discovered that based on a household income of $175,000 and a 30-year amortization, they would qualify for a maximum mortgage amount of $1,217,233 (with an interest rate of 2.99%), for a maximum house price of $1,417,233.

But the stress test says that they must use the 5.25% rate instead. That means they can now qualify for a maximum mortgage of $928,153 instead of $1,217,233 — a difference of $289,080. (For simplicity’s sake, no other debt has been included in the calculation; the monthly property tax is $462, and the monthly heating cost is $100.)

 

Maximum affordable mortgage

Maximum purchase price

(assuming a $200,000 down payment)

Negotiated rate of 2.99%

$1,217,233

$1,417,233

Stress test rate of 5.25%

$928,153

$1,128,153

Dr. Wise and her husband’s monthly mortgage payments will still be based on their negotiated rate of 2.99%, but they will qualify for a lower maximum mortgage because of the federal mortgage stress test rules.

Note: If you’re a resident physician seeking approval for a mortgage from Scotiabank, the amount of mortgage you can qualify for will be based on your projected income,1 rather than your current income.

There are exceptions to the rule

There are three exceptions — the stress test is not applied to the following:

Mortgage renewals: If you renew your mortgage with your existing financial institution/lender, the stress test rules won’t apply.

Existing mortgage applications: If you’ve received approval for a mortgage already, the new rules won’t affect your mortgage, regardless of when your home purchase closes.

Credit unions: The rules apply only to federally regulated financial institutions, not credit unions. Certain credit unions may choose to apply the same stress test, however, so be sure to determine this before you apply.

Before you start looking for a home, use MD’s mortgage calculator to explore your mortgage options. The right information can help you choose the mortgage solution that best fits your life. 

An MD Advisor* can help you to budget and to determine how a mortgage will fit into your financial plan. When you’re ready, check out Scotiabank’s eHOME online mortgage hub, which lets you get pre-approved, search for a home and get a mortgage approval — all in one place, and all online.2

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.

1 Projected income is an average estimated amount based on available industry data and is subject to change. Your actual income may vary. Terms and conditions apply.

2 All mortgage applications are subject to Scotiabank’s standard credit criteria, residential mortgage standards and maximum permitted loan amounts.

All banking and credit products and services are offered by The Bank of Nova Scotia (“Scotiabank”). Credit and lending projects are subject to credit approval by Scotiabank.

The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice, nor is it intended to replace the advice of independent tax, accounting or legal professionals.