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Back in October of 2017, the Bank of Canada announced the mortgage stress test, which officially went into effect in January. Here’s what you need to know about this new mortgage qualification process.

What is it?
It makes borrowers looking for a mortgage qualify for home financing at a higher rate than their actual mortgage interest rate—the amount depends on how much you can put on your down payment. If you are paying 20 per cent or less of the home’s value, you can only qualify at the higher rate between the contract rate and Bank of Canada’s current rate. Those paying more than 20 per cent must qualify at the higher of the contract rate and their benchmark rate, plus an extra 2 per cent.

Why was it implemented?
The requirement exists with the intention of preparing borrowers for potential significant rises in mortgage rates, to help ensure that an owner will not end up unable to pay their mortgage or end up underwater—owing more than the home is actually worth.

How can you prepare for it?
The test means that buyers can no longer afford quite as much as they previously could. Smaller mortgages will be offered by lenders because of these new qualifications, meaning you may not be able to buy the dream home you had hoped for right away. Prepare by being open to a condo or townhouse instead of a detached home, or looking in less expensive markets. It’s also important to avoid getting into bidding wars (common in this competitive market) as you may not be able to acquire the mortgage needed if the price ends up more than the lender’s appraisal.

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