Why you need to stress test your mortgage debt

In October, the federal government announced changes to mortgage laws that will affect the amount of money many Canadians are able to borrow. As of October 17, all insured mortgages — generally speaking, any mortgage with a down payment less than 20 per cent — will need to be stress tested to see if the borrower could still afford to make mortgage payments at a higher interest rate. While the new rule does not retroactively apply to existing mortgages, this could still serve as a wakeup call for all Canadians currently carrying mortgage debt.

Could you still pay your mortgage if interest rates double?

The mandatory stress test will test homebuyers’ ability to make mortgage payments at the Bank of Canada’s five-year conventional mortgage rate, which, at the time of the announcement, stood at 4.64 per cent — a full two percentage points higher than some rates offered by lenders. Under certain scenarios, a Canadian household with a six-figure income might potentially see the mortgage they qualify for shrink by nearly $140,000. But this brings up a fundamental question around housing affordability: If you would struggle to pay your mortgage after an interest rate increase, should you be concerned about your level of mortgage debt?

Stress test your debt with a mortgage calculator

Whether you’re buying a new home, have an upcoming mortgage renewal or would simply like to know the effect of an interest rate increase on your mortgage payment, you can try using a mortgage calculator. An online mortgage calculator allows you to update the interest rate on your mortgage, along with other variables like payment frequency and the remaining amortization period.

The Financial Consumer Agency of Canada (FCAC) has an online mortgage calculator that is easy to use and can quickly show you how any changes in interest rates could affect your mortgage debt.

I locked in my mortgage before October 17th. How does this affect me?

Although the new government regulations will not affect the terms of your pre-existing mortgage, it is a good idea to stress test your mortgage debt to see what could happen when interest rates eventually increase. Right now, interest rates in Canada are near all-time record lows, and while an increase might not be forthcoming for another year or two, it is very likely that rates could rise over the medium-to-long-term. After all, in 1981, Canadian fixed mortgage rates peaked at 21.46 per cent — a far cry from the sub-three-per-cent rates we see offered today.

Now, it’s not very likely that mortgage rates will hit 20 per cent before you pay off your mortgage debt. However, it would be a good idea to apply the government’s official stress test — roughly a two percentage-point increase — to your mortgage debt to see how you would cope in such an event. By being financially prepared and adjusting your monthly budget ahead of time, you will then be able to weather a slight increase in interest rates.

Have the new government rules affected your plans to buy a home? Join the conversation on Twitter using the hashtags #BDOdebtrelief #LetsTalkDebt