Mortgage Stress Test: What is it and how does it work?

Welcome to your home affordability buffer.

Lenders use the federal stress test to check if you can handle higher payments if rates go up or your income drops — and limits how much you can borrow to buy a home.

Jan 23, 2024

Updated from May 10, 2023

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Aren't mortgages stressful enough?

Apparently, that's precisely why this federal rule exists. There's (arguably) no worse stress than being unable to afford your payments after you buy a home.

What is the mortgage stress test?

Set by OSFI (Office of the Superintendent of Financial Institutions), it's a rate set higher than your contract rate to test your finances and mortgage amount when approving your application.

Regulated lenders are required to use it to insist on a payment 'buffer' and margin of financial safety. That way, if rates go up or your income drops when you go to renew or refinance, you have some room to adjust to higher payments and avoid default.

It doesn't just shield you, it also protects lenders from people not being able to repay their mortgages (not you, of course).

What is the current stress test rate?

As of June 2021 changes, a lender will use whichever is higher — either a rate of 5.25% OR your actual rate plus 2.0% to qualify your mortgage loan amount.

Most rates today surpass the 5.25% minimum, so your qualifying stress-test rate depends on getting your best rate.

For example, if the rate you get from your expert mortgage broker is 5.64%, you'll be stress-tested to handle payments at 7.64%. (Use our Mortgage Payment Calculator to see the payment difference for both rates.)

Your pre-approved mortgage amount (or actual mortgage amount if you've found a home to buy) and financial details factor into getting your best qualifying rate AND whether you'll be able to handle the payments.

Do you have to be stress tested? A mortgage stress test is applied by regulated lenders for all your mortgage needs, including new purchases, renewals and refinances. And for any rate type (variable or fixed) or term length. Alternative and private lenders (unregulated) may not be required to use the stress test.

How does the stress test work for the mortgage amount you can borrow?

When you go to buy a home, the stress test can limit your home purchase price or require a bigger down payment to reduce your mortgage loan amount.

For example, let's assume some basic details: an annual income of $100K, 5% down payment and 25-year amortization:

  • With a contract rate of 4.54%, at the previous rate ceiling of 5.25%, you might be able to afford a house price of $475K
  • Now you'll need to handle payments at a stress-test rate of 6.54%, which will likely reduce your approval amount to $430K
  • This example shows that you'll qualify for up to 10% less home using the current higher mortgage stress test
  • As mortgage rates (and the mortgage stress test rates) go higher, you'll qualify for less home based on the above details.

Note: For illustrative purposes only; your affordability depends on your financial details, mortgage rate and house price.

Do you have a strong mortgage application?

Depending on the lender, you may qualify for more despite the federal stress test limit— or for a lower rate based on your particular financial details.

Factors such as a steady income source, good credit standing, lower debt service ratios and whether your mortgage is insured can help to increase your home affordability.

How do your numbers line up? Talk or apply with us — our expert True North Mortgage brokers can check with several accredited lenders to find your best rate and product fit for your optimal pre-approval numbers.

We also offer free, unbiased advice for ways to increase your down payment, reduce debt or improve your credit report to strengthen your application in the eyes of a lender.

Debt Service Ratios: Lenders use two percentages based on your monthly income to assess your home affordability: Gross Debt Service (GDS) and Total Debt Service (TDS). Read more here.

Why is there a stress test?

The stress test is used to protect you (the borrower) and financial institutions from budget and debt-related trouble if mortgage rates rise.

“The minimum qualifying rate adds a margin of safety that ensures borrowers will have the ability to make mortgage payments in the event of change in circumstances, such as the reduction of income or a rise in mortgage interest rates. As mortgages are one of the largest exposures that most banks carry, ensuring that borrowers are able to repay their loans strongly contributes to the continued safety and soundness of Canada’s financial system.”

- Office of the Superintendent of Financial Institutions (OSFI)

With current higher rates, the mortgage stress test has helped to keep many homeowners out of the default range (for now). And, if rates continue to go up, or the economy is volatile, this stress-test regulation offers the Government of Canada a convenient mechanism to dissuade potential home buyers from taking on higher mortgage debt and further shield our banking system from default volatility.

Fact: The Mortgage Stress Test was first initiated in 2016 because of sustained lower rates, and at the time, only applied to insured mortgages (less than 20% down payment).

How often do you need to repeat the mortgage stress test?

If you're switching lenders at mortgage renewal or need a refinance, you'll need to requalify using the mortgage stress test.

We can advise you on strategies to help you requalify at renewal if you want a better rate or need more flexible mortgage options to save money: read more here.

What if a bank says 'no' to your application?

Many Canadians feel strongly about owning a home. If your mortgage application doesn't tick all the boxes for traditional lender requirements (that stringently follow the mortgage stress test rules and other qualification criteria, such as a higher minimum credit score), an alternative lender may be able to tailor a solution.

An alternative or private lender product means you’ll pay higher mortgage rates and fees to cover a lender’s increased costs and risk factors in taking on your loan. Still, it can offer you the ability to get the home you want, keep your home, or work towards a better rate in the future.

Are there changes coming to the current mortgage stress test?

OSFI made no changes to the actual stress test in 2023. However, it did:

  • Require that lenders hold more capital due to amortizing fixed-payment variable-rate mortgage products.
  • October 2023 — Highlight a rule buried in the fine print that lenders can drop the stress-test requirement for eligible insured mortgage renewals.
  • November 1, 2023 — Limit the borrowing room on re-advanceable home equity lines of credit — a maximum of 65% loan-to-value rather than the 80% LTV previously allowed.

So far, for 2024:

  • This January, OSFI announced adjusting debt criteria for uninsured mortgages to protect lenders from overleveraged clients when mortgage rates decline. It wants to add another qualifying ratio (loan-to-income, LTI), which may lead to indebted clients having to pay even higher renewal rates.

OSFI's proposed changes take a few months; check back for updates.

You can also subscribe to our newsletter for trending mortgage news.

We can help you prepare for your (mortgage) test.

  • Know the current stress test rate (hint: look above!)
  • Get pre-approved to know your numbers before home shopping
  • Work on reducing your debt (talk to us first about how changes can affect your mortgage approval)
  • Get first-home help with your down payment
  • Get the best rate and lender for your situation

Anywhere you are in Canada, we're here to help you with a stress-free mortgage experience. Get in touch online, over the phone, drop by a store, or start chatting with Morgan, our chatbot!

Pass the stress test with expert advice and your best rate.