What Is The Mortgage Stress Test

The stress test refers to the new rules for federally regulated mortgages, of which all-in rates are 5.25% or higher, that came into effect on January 1st 2018. The government issues and backs mortgages and it used this power to enforce a stricter loan qualification process in order to mitigate risk and prevent widespread foreclosures, such as in the US after the financial crisis of 2008.

The new rules apply to all federally regulated financial institutions and were put in place to control speculation and protect homebuyers from taking on more debt than they can handle under extreme market conditions.
Provincial rules may also apply to a certain degree for mortgages that are indirectly backed by the federal government. Most notably, those banks with less than 10 branches have been largely exempted from these new mortgage stress tests as they have limited exposure to large borrowers and do not pose as much of a systemic risk as their larger counterparts.

The stress test is a new system put in place by the federal government on January 1st 2018 that forces borrowers to qualify for an uninsured mortgage at either Bank of Canada's qualifying rate (usually 4.89%) or their contractual mortgage rate +2%. For example, if you are contracted with a 5% mortgage, then your stress-test qualification rate would be 7.89%. This is in an effort to mitigate risk by taking into account extreme market conditions when issuing mortgages, which the government feels are not accounted for when borrowers qualify for a mortgage at their bank's lower advertised rates.