1. Home Loan with a Single Loan Component: This is straightforward; take the contract rate + 2%. E.g. If the loan’s contract rate is 2.5%, then calculate 2.5% + 2% = 4.5% and compare that to the BOC 5-year benchmark rate.
2. Home Loan with More than One Loan Component: Where a loan has more than one component, the stress test rules determine we must use the highest interest rate of all of the loan components for our test, irrespective of the rate type or size of the loan component, etc. E.g. Let us say we have a home loan with two components; a mortgage plus a Home Equity Line of Credit [HELOC]. Assume the mortgage contract rate is fixed at 2.34% and the HELOC’s rate is variable at Prime [P] + 0.6% [2.45% + 0.6% = 3.05%]. [As of this writing, most financial institutions’ prime lending rate is 2.45%]. There are two different interest rates in this example, so which one should we use for our test? The HELOC has the higher interest rate of the two loan components. Thus the HELOC interest rate will be used for the entire loan to check whether the contract rate + 2% is lower or higher than the BOC 5-Year benchmark rate. A quick calculation shows that the contract rate plus 2% equals 5.05%. [3.05% + 2%= 5.05%]

Before calculating the stress test interest rates for our examples above, let us reiterate that the mortgage stress test interest rate is determined by the higher of the BOC 5-year benchmark rate or the financial institution’s mortgage loan contract interest rate plus 2%.
Assuming a BOC 5-year benchmark rate of 4.79%, the mortgage stress test interest rate for each of the above examples are:

• Home Loan with a Single Loan Component: The contract rate + 2% [2.5% + 2% = 4.5%] is less than the BOC 5-year benchmark rate [4.79%]; thus, the stress test rate for this loan will be the higher 4.79% BOC 5-year benchmark rate.
• Home Loan with More than One Loan Component: The contract rate + 2% [3.05% + 2%= 5.05%] is higher than the BOC 5-year benchmark rate [4.79%]; thus, the stress test rate for the entire loan will be the higher 5.05%, contract rate +2%.

Here are a few important notes and things that need to be known that may seriously affect the applicant about the stress test:

• The stress test interest rate is not fixed in time: Since the BOC 5-year, benchmark interest rate and the lender’s contract interest rates can change at any time, the stress test interest rate can change without prior warning or notice.
• The higher the stress test rate, the lesser the mortgage eligibility: This may seem obvious, but it can be disastrous if the plan is to purchase a property to the maximum value of the mortgage qualification ability, as it may no longer qualify the applicant for the mortgage they need if the stress test rate increases. The applicant must confirm what stress test rate was used to qualify for the mortgage. The applicant should follow up with the mortgage broker to ensure that the mortgage’s stress test interest rate has not increased.
• Pre-approvals do not lock the stress test interest rate: The pre-approval or pre-qualification does not lock the stress test interest rate.
  Thus, the pre-approved mortgage amount will reduce if the stress test rate increases regardless of pre-approval.
• The stress test is not a universal interest rate: As we have shown above, the stress test rate is determined by multiple factors such as the mortgage product chosen, the BOC 5-year benchmark rate, etc.; thus, the stress test interest rate must be determined for each applicant’s unique situation, and it cannot be quoted as a single interest rate that fits all situations.
  This also means that the stress test interest rate for a particular product or circumstance may limit eligibility for a mortgage or mortgage product the applicant requires.
• Contract rates do not determine the mortgage eligibility: It is logical to assume that when interest rates are low, the applicant will be eligible for a higher mortgage amount, but as we determined, but this is not true because the stress test interest rate determines the applicant’s mortgage eligibility and not the contract interest rate. The contract interest rate does, however, affect the budget because it determines the actual mortgage payment.
• Unintended consequences of the stress test: If the applicant obtains a mortgage from a financial institution when the stress test rate is lower, they may not be eligible for the same mortgage later if the stress test rate increases. This means that they would not be able to change their mortgage and/or move the mortgage to a different lender later if they wish to, and they could be “trapped” with that lender for a while, so make sure the lender’s terms & conditions are understood and they are best suited to the applicant’s needs and circumstances.
• The applicant will qualify for less mortgage than before: The stress test interest rate will cause the applicant to be eligible for a lesser mortgage than prior to the stress test rules implementation, using the same income. Be well prepared before applying for a mortgage.
• Does the stress test affect the applicant?: The mortgage stress test applies to all federally regulated financial institutions, so anyone applying for a mortgage from such financial institutions is subject to the federal stress test rules, irrespective of down payment, credit, house price, property occupation, etc.