Stress Test
In lending and mortgages, a stress test is a financial assessment used by lenders to ensure that borrowers can still afford their mortgage payments even if interest rates rise significantly. The goal is to reduce the risk of borrowers defaulting on their loans due to future financial stress caused by higher rates.
Here’s how it works:
Lenders evaluate the borrower's ability to make mortgage payments not only based on the current interest rate but also on a higher, hypothetical rate (the stress test rate).
In Canada, for example, borrowers are tested at either the Bank of Canada's qualifying rate (typically higher than market rates) or the mortgage contract rate plus an additional buffer, whichever is higher.
By applying the stress test, lenders ensure that borrowers can afford their mortgage even under tougher financial conditions. This is particularly important for variable-rate mortgages, where payments could increase as rates rise.
Learn More About Any of These Terms:
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A
- Oct 2, 2024 Amortization
- Oct 8, 2024 Alternative Rates
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B
- Oct 2, 2024 Beneficiary
- Oct 8, 2024 Bank Statement Program
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C
- Oct 2, 2024 Contribution Limit
- Oct 2, 2024 Emergency Fund
- Oct 2, 2024 Conversion
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D
- Oct 2, 2024 Death Benefit
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F
- Oct 17, 2024 Flexible Debt Ratios
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- Oct 2, 2024 Graduate Program
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- Oct 2, 2024 Home Equity Line of Credit (HELOC)
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- Oct 2, 2024 Lender Fee
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M
- Oct 2, 2024 Mortgage Insurance
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- Oct 2, 2024 Premium
- Oct 2, 2024 Permanent Life Insurance
- Oct 17, 2024 Penalties
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R
- Oct 2, 2024 Risk Tolerance
- Oct 2, 2024 RRSP (Registered Retirement Savings Plan)
- Oct 2, 2024 RESP (Registered Education Savings Plan)
- Oct 17, 2024 Rental Program
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- Oct 1, 2024 Stress Test
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- Oct 2, 2024 Term Life Insurance
- Oct 2, 2024 TFSA (Tax-Free Savings Account)