Nearly half of Canadians still find mortgage stress test confusing

By: Jessica Mach on April 30, 2019

Despite news that the mortgage stress test has prevented scores of Canadians from buying homes and accounted for a staggering $15-billion drop in mortgage sales last year, a surprisingly large number of Canadians still don’t know how the stress test works — or even how it impacts them.

Nearly half (43%) of Canadians are not confident that they understand the Office of the Superintendent of Financial Institutions’ stress test rules, said a new survey by Toronto-Dominion bank (TD) released Tuesday. Meanwhile, 59% of respondents said that they don’t understand how the rules impact their lives.

Other aspects of the mortgage market confuse Canadians, too. A staggering 81% of survey respondents said that they don’t know how rising mortgage rates will affect their finances.

Another 42% do not fully understand the implications of pausing their mortgage payments or taking a mortgage vacation, while 31% said they don’t know how mortgage prepayment rules work.

Finally, 28% reported not knowing the difference between pre-qualification and pre-approval in the context of the homebuying process. (A pre-qualification is when your mortgage broker evaluates your debts, income and assets to determine how much money you can afford to borrow — e.g., the size of your mortgage — while a pre-approval is when a lender has agreed to lend you a mortgage.)

Standard mortgage rules can be confusing enough to navigate on their own, but the introduction of federal, provincial and municipal housing regulations in recent years has muddied the homebuying process even further — the terms of homebuying keep shifting with each new rule.

The stress test was one such rule. Introduced at the start of 2018 to discourage Canadians from buying homes they could not afford, the rule requires the banks to stress test mortgage applicants to see if they could realistically service a mortgage either at the bank’s five-year posted rate or two percentage points higher than the rate they’re being offered — whichever one is higher.

Since then, some critics of the stress test have lobbied to extend the maximum amortization in Canada from 25 years to 30, while the provincial governments in charge of the most expensive housing markets in Canada — Vancouver and Toronto — have introduced a series of housing taxes and regulations in an effort to rein in runaway prices.

Recently, the rise of shared equity mortgages — both public and private — have added another layer of complexity to the country’s housing market.

“Whether Canadians are looking for a new property or if this is their first time around the block, buying a home is one of the biggest financial decisions they will ever make,” read TD’s release. “It’s important for Canadians to feel prepared and confident at every step of the homebuying journey.”