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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.

Mar 24, 2024

Updated from January 1, 2024

Buyers Spring Back 5

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 who are unable to repay their mortgages (not you, of course).

In the news:

Canada's competition watchdog released a report on March 21, 2024, urging OSFI to drop the stress test for uninsured mortgage switches at renewal (insured mortgages already have a pass). Will it happen? Doubtful. Read more here.

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.)

Fact: In 2016, OSFI ushered in the Mortgage Stress Test due to government concern about sustained lower rates. It only applied to insured mortgages (less than 20% down payment) when first introduced.

When do you need to be mortgage stress-tested?

A mortgage stress test is applied by regulated lenders for all your mortgage needs:

  • New home purchases, for any rate type (variable or fixed) or term length
  • Refinances
  • Renewals — but only IF you want to switch lenders and your mortgage is uninsured (insured mortgage can switch with no stress test

Alternative and private lenders may not be required to use the stress test, depending on how they're regulated, instead using other factors to qualify you.

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.

Lower rates can help you qualify.

Here are some factors that can help you qualify with a lender for a lower rate:

  • Steady income source
  • Good credit standing
  • Lower debt service ratios
  • Whether your mortgage is insured
  • Finding the best-possible rate, for example, through an MFC (Mortgage Finance Corporation) vs a big bank
  • Having an expert broker, like at True North, shop the banks and lenders for you

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.

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

Many Canadians feel strongly about owning a home. However, your mortgage application may not tick all the boxes for traditional lender requirements, including the mortgage stress test. In that case, we may be able to tailor a solution.

Read more here about the complex mortgage situations we often see and help with.

Are there changes coming to the current mortgage stress test?

OSFI considers possible mortgage rule changes every year. Read our blog Will Mortgage Rules Change? for the latest news.

The stress test has prepared home buyers for today's higher rates.

The federal mortgage stress test was introduced when mortgage rates were low to protect home buyers if rates went higher — so that they could still afford their payments and not default on their mortgages (which also affects lender stability).

The law wasn't well-received then, as Canadian home prices were considered lofty, and first-time buyers were trying to find an affordable way into the housing market. Of course, now that rates (and most home prices) are higher, both OSFI and lenders are pleased with the results. Even though mortgage delinquencies are increasing as high rates wear on, they're still within normal parameters considering the weakening economy.

We can help you prepare to pass 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 test with flying colours (aka expert advice) and your best rate.