The Canadian Mortgage Stress Test Has Gone Up & Here's What That Means

The mortgage stress test in Canada has gone up after a recent interest rate hike, which means buying a house just got even more difficult.

According to a new report by Ratehub, the annual income needed to buy a home across Canada has increased, even in places where housing prices have gone down.

From March to June 2022, Canadian home buyers had to earn anywhere from $8,660 and $35,760 more, per year, to afford a home depending on their location because of interest rate and stress test increases.

The city that saw the biggest jump was Victoria, B.C., which had a 23% increase.

This means someone hoping to buy a home in Victoria will need an additional $35,760 a year — making the total income required $187,980.

Other cities that saw a double-digit increase in the required income to buy a home included Vancouver, which saw people needing 16% more, Halifax at 21%, and Calgary at 18%.

This is because recent hikes to Canada's prime interest rate have meant that mortgage rates, and therefore stress test rates, have gone up.

The stress test is a risk assessment that a mortgage lender will do where they add hypothetical additional percentage points to your mortgage rate to see how much volatility in the market you could afford.

Typically the stress test rate will be the mortgage rate given to you by your lender of either plus 2% or a flat 5.25% — whichever one is higher.

This means that as interest rates rise, so does that stress test minimum.

And, according to this study, the stress test rate could be as high as 7.21% right now.

This affects homeowners because how much money your lender gives you is dependent on how well you can afford the additional percentage that might come your way if mortgage rates got that high.

This is why residents in some cities, despite actually seeing a decrease in the cost of a house, still required a higher income to buy a home.

Places like Vancouver, Toronto, Ottawa and Winnipeg all experienced this phenomenon despite housing prices actually going down in June compared to March.

According to Ratehub Co-CEO James Laird, for every 1% stress test rate increase, it means a 10% smaller mortgage for homebuyers.

This means that for the average costs for homebuyers to start going down again, there needs to be a significant drop in house prices to offset the stress test.

So if you're feeling the squeeze on housing, you're not alone. Matter of fact, tons of Canadians are actually considering relocation in an effort to achieve housing affordability.

But if you're looking to stay put, there are a few new benefits and programs by the federal government that are trying to make it easier for homebuyers.

This article's cover image was used for illustrative purposes only.