The Mortgage Stress Test has already increased for some borrowers

All eyes have been on the Bank of Canada’s recent rate tightening and its impact on variable mortgages, but now there are fresh concerns given the flurry of recent increases to 5-year fixed mortgage rates.

The result is that most 5-year uninsured mortgages offered by the banks now range between 3.39% and 3.79%.

For today’s borrowers who secure a rate of 3.25% or higher, it means they are stress-tested at their contract rate plus 2% and not the Bank of Canada’s mortgage qualifying rate (MQR) of 5.25%.

That’s because both insured and uninsured mortgage borrowers are qualified based on the contract rate plus 2%, or 5.25%, whichever is higher. For a growing number of borrowers, that rate is now going to be higher than 5.25%.

And that negatively impacts borrower debt service ratios, and perhaps their purchasing power as well.

You can expect to hear more of this in the months to come as 5-year rates have been marching higher at an alarming pace, and it may not be long before they are over 4%.

Here is a scenario coming to a theatre near you: Your household income is $110,000. Using the MQR of 5.25%, you qualify today for a mortgage of roughly $544,000 for a condo costing $680,000, with typical property taxes and maintenance fees.

Suppose in a couple of months you want to take a 5-year mortgage and that rate is now 4.25%. The new stress test qualifying rate used would then be 6.25%.

And that would reduce your borrowing power by 9%, to roughly $494,000.

Rising rates will clearly have an impact on housing affordability and perhaps herald price reductions in over-heated markets.

The Takeaway

We have been spoiled over the past couple of years with unnaturally low pandemic-induced rates. But those were not normal, nor are they sustainable.

We cannot rely on the past to predict future interest rates, and many borrowers are now asking how to best prepare for rising mortgage rates. It’s usually prudent to stay within your means. Choose the mortgage term and type that makes most financial sense to you, and only borrow that which you qualify for and can afford to repay.

If you don’t have the stomach for this sea of change we are experiencing, then perhaps it is best you choose the 5-year fixed rate and give yourself peace of mind and payment certainty for the next several years.

And if your mortgage is renewing this year, you might be wise to consider paying a prepayment penalty and locking up current rates before they get much higher.


For more information: Reach out to the mortgage experts at Centum Mortgage.

Kevin Harris

Mortgage Broker

Centum Mortgage Exchange

LIC # M08002420

Direct: 705.321.9273

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