How Much House Can I Afford in Ontario? The Mortgage Stress Test Explained

Confused by the mortgage stress test in Ontario? This guide simplifies the rules, shows you how it impacts your affordability, and helps you qualify for a mortgage.

Demystifying the Mortgage Stress Test for Ontario Home Buyers

What is the Mortgage Stress Test? A Simple Explanation

The mortgage stress test, also known as the B-20 Guideline, is a federal rule that requires all homebuyers in Canada with a down payment of less than 20% to qualify at a higher interest rate than their actual mortgage rate. The purpose of the stress test is to ensure that you, the borrower, can still afford your mortgage payments if interest rates were to rise.

This means that even if you're approved for a 5-year fixed rate mortgage at 5.5%, you must prove you can make the payments at a higher qualifying rate.

How the Stress Test Impacts Your Borrowing Power

The stress test directly impacts how much you can borrow. The qualifying rate is the higher of two rates:

1. The contract rate on your mortgage plus 2%.

2. The Bank of Canada’s benchmark qualifying rate.

Because this qualifying rate is higher, the amount of money you can borrow is significantly lower than it would be without the stress test. It's a key reason why many homebuyers are often surprised by the amount they can actually qualify for.

The Rationale Behind the Stress Test

The stress test was implemented for two key reasons:

1. Protecting Homeowners: It acts as a financial safeguard for you. It ensures you won't be in a position to default on your mortgage if rates go up or if you experience a financial hardship.

   
   

2. Stability for the Canadian Economy: On a broader scale, the stress test is designed to prevent a housing bubble and ensure the stability of the entire Canadian financial system.

   
   

Strategies to Pass the Stress Test and Increase Your Mortgage Qualification

While the stress test may seem like a hurdle, there are several strategies you can employ to increase your borrowing power.

Increase Your Down Payment

The most effective way to increase the amount you can borrow is by increasing your down payment. A larger down payment reduces the total amount of your mortgage, making it easier to pass the stress test. If you can get to a 20% down payment, the stress test becomes much less of a factor.

Pay Down Your Debts

The amount of money you can borrow is directly tied to your existing debts (credit card balances, car loans, etc.). By paying down or eliminating your debts, you improve your debt-to-income ratios, which in turn increases your mortgage qualification amount.

Boost Your Credit Score

A higher credit score can help you secure a lower contract interest rate. While it won't change the qualifying rate, it can make your overall application more attractive to lenders and may give you access to a slightly larger mortgage amount.

FAQ Section (People Also Ask):

• Is the mortgage stress test still in effect in Ontario?

• Does the stress test apply to mortgage renewals?

• How does the stress test affect first-time home buyers in Ontario?

• What is the current qualifying rate for the stress test?

  
  

The stress test can feel like a hurdle, but it's just one part of the journey. I can help you understand your affordability and create a strategy to get the financing you need. Let’s connect for a stress-free consultation.

Don't let the stress test stress you out. With the right strategy, your dream home is well within reach.

– Corey Your Mortgage Pro