Before reading this article, it is highly encouraged to read the accompanying article (hyperlink to GDS/TDS article).
The Government of Canada imposed a requirement on financial institutions and other “A” lenders to determine whether a borrower should be approved for a mortgage. This led to the creation of the stress test. The stress test is used as one factor in calculating an applicant’s GDS (Gross Debt Servicing Ratio) and TDS (Total Debt Servicing Ratio).
To calculate the mortgage payment for the property you are applying for, you must use a rate of 5.25% or the rate you are offered for your mortgage plus 2.00% (whichever is greater).
Essentially, this test takes the applicant(s)’ income and assesses it against a higher threshold than what is necessary to afford the mortgage they are applying for. But why? In 2018, the government recognized that Canadians were taking on too much debt—particularly related to secured debt against homes—and decided to reduce the amount Canadians could be approved for.
This had positive effects not only on the amount of debt Canadians were incurring but also on decreasing the likelihood of defaulting on a mortgage in the event of sudden rate increases during the loan term. However, a negative effect was that it made homeownership more difficult
for first-time buyers, especially younger Canadians starting their lives and careers, as they became subject to the stress test.
How can you calculate your mortgage payment’s stress test? Use this calculator and input 5.25% or the rate you expect to receive for your mortgage plus 2.00% (whichever is greater).