How the stress test rate is calculated
For uninsured home buyers (anyone who qualifies with a down payment of 20% or more) the minimum qualifying rate is based on either the Bank of Canada’s five-year benchmark rate (5.14% at the time of writing) or the rate offered by your lender plus 2% – whichever is higher. Buyers with default insured mortgages (i.e. anyone who makes a down payment of less than 20%) must qualify using either the Bank of Canada five-year benchmark rate, or the rate offered by your lender (without adding the extra 2%) – whichever is higher.
So if your lender offers a rate of 2.99%, you’ll have to use the 5.14% benchmark rate in your stress test. If you make a 20% down payment and your lender offers a rate of 3.49%, you’ll have to qualify using a rate of 5.49%.
Although the new mortgage rules are supposed to protect the Canadian housing industry (and make sure that Canadians are spending within their means), the changes also mean that you might have to settle for a lower budget.
For example: Let’s say you have a household income of $87,000 and made a down payment of 20%. Before the new rules, you may have been able to afford a maximum purchase price of $508,069 (based on a 2.99% rate). Now, because of the 2018 mortgage rules, you’ll have to qualify for a rate of 5.14%. This means you may only be able to afford a maximum purchase price of $393,716, which is 22.5% less than under the previous rules.
Information source: Bank of Montreal BMO