When a borrower applies for a mortgage loan, they must qualify at a higher interest rate than the actual rate they’ve agreed to with their lender. This is the minimum qualifying rate (MQR), sometimes called a stress test.
What is the MQR?
When applying for a new mortgage, borrowers need to qualify at whichever interest rate is higher:
- 2% more than the actual rate they’ve agreed to with their lender, or
- At least 5.25%
- Also, when a down payment is less than 20% of the value of home, lenders are required by law to insure the loan with a mortgage insurer.
Renewing mortgage loans
When it comes time to renew, borrowers are welcome to shop around and renew with the same or another lender:
- If renewed with the same lender, the MQR is not needed. The lender already assessed the borrower’s ability to repay the loan over the long-term.
- If a borrower transfers their mortgage to a new lender, the MQR is applied again. Each lender is willing to accept a certain level of risk (called ‘risk appetite’). We expect lenders to assess each new loan against their own risk appetite.
- There are exceptions, like when a borrower transfers their insured mortgage to a new lender. In this case, the borrower was already assessed against the mortgage insurer's risk appetite. The borrower’s credit risk isn’t moving to the new lender. Rather, it was already transferred to the mortgage insurer for the life of the loan.
When it comes to mortgages, it is important for borrowers to pass the MQR, whether the economy is going great or feeling tough. During the recent interest rate hikes and increased cost of living, most Canadians were able to continue to pay their mortgages. Default rates, while on the rise, continue to be low compared with historical levels.
Setting the MQR
To make sure the MQR is at the right level for the current financial market, we review it every year. To do the review, we gather a lot of information:
- We assess data collected from our role in monitoring banks
- We examine statistics that tell us what financial shocks Canadians are likely to face, like household debt levels and house prices
- We consult with the Department of Finance and the Bank of Canada
OSFI’s role
The MQR also supports a well-functioning financial system. Mortgage loans make up a large portion of the lending that banks do. If borrowers can’t repay their loans, it could affect the whole system.
Our work touches many areas. We oversee more than 400 financial institutions and 1,200 pension plans.
We regulate and supervise lenders and insurers to make sure they manage a range of risks they face, in particular the risk of financial loss. Strong institutions help support a strong economy.