The mortgage stress test, explained

The stress test is a rule that makes you prove you could still pay your mortgage if interest rates rose. It does not change the rate you actually pay. It only decides how much you are allowed to borrow.

The short version: lenders check your debt ratios at the greater of your contract rate plus 2 percentage points or 5.25%.

The rule

For most new mortgages, lenders calculate your payment at the qualifying rate. OSFI, the federal banking regulator, sets this as the greater of your contract rate plus 2 percentage points or 5.25%. OSFI reviews both components at least once a year.

• A 4% contract rate gives a 6% qualifying rate.
• A 3% contract rate gives 5.25%, because the floor applies.

How it is used

They then check that payment against your income in the two debt-service ratios: housing costs can be at most 39% of your gross income (GDS) and total debts at most 44% (TDS). The qualifying payment is higher than your real payment, so the test usually lowers your maximum mortgage by roughly 15% to 20% compared with what you would qualify for at the contract rate.

Who it applies to

• New mortgages, insured and uninsured: yes.
• Most refinances: yes.
• Renewing with your current lender: no new test.
• Uninsured borrowers switching lenders at renewal: generally exempt, if the loan amount and remaining amortization do not increase.

Example: $500,000 mortgage, 25 years, 4.00% contract rate

• Your real payment: about $2,630 a month.
• The test rate: 6.00% (4.00% + 2).
• The payment used to qualify: about $3,199 a month.
• You need enough income to carry $3,199 plus property tax and heating within the 39% and 44% limits, even though you will only pay $2,630.

If the test limits you

• Increase your down payment so you need a smaller mortgage.
• Pay off debts, especially those with high monthly payments.
• Add a co-borrower with income and good credit.
• Look at a lower price, or a home with lower condo fees or property tax.
• Choose a 30-year amortization if eligible, which lowers the qualifying payment by about 7%.
• Wait and save, or reapply when your income has grown.

Why it exists

The test protects borrowers and the financial system by making sure households have a buffer. It can feel restrictive, but it also helps you avoid taking on a payment that would be hard to keep if rates rise at renewal.

A lender or broker can tell you exactly where you stand. See our guide on how much mortgage you can afford for a worked example.

The rule can change, so confirm the current figures.

Sources: OSFI: minimum qualifying rate, CMHC: calculating GDS and TDS.