Overview
The mortgage stress test is a Canadian government requirement designed to ensure that homebuyers and homeowners can afford their mortgage payments even if interest rates rise in the future. Since its introduction, the stress test has played a crucial role in maintaining the stability of Canada’s housing market and protecting borrowers from overextending themselves financially.
How the Mortgage Stress Test Works
- Applies to: All new mortgage applicants, including those with down payments of 20% or more (conventional mortgages), and those refinancing or switching lenders. It does not apply when simply renewing with the same lender.
- Qualifying Rate: Borrowers must qualify at the higher of:
- The Bank of Canada’s minimum qualifying rate (currently 5.25%)
- Or the actual rate offered by the lender plus 2%
- Purpose: The test ensures borrowers can handle higher payments if interest rates climb, reducing the risk of default.
"To qualify for a mortgage from a bank, you'll need to pass the mortgage stress test. So if you are buying a home, refinancing your current home, or, in some cases, switching your lenders, you need to prove that you can afford a mortgage at a higher rate than the one you're approved for."
Example Calculation
If you are offered a mortgage rate of 5.49%:
- Stress test rate = 5.49% + 2% = 7.49%
- Since 7.49% is higher than the Bank of Canada’s 5.25%, you must qualify at 7.49%.
If you are offered a mortgage rate of 4%:
- Stress test rate = 4% + 2% = 6%
- Qualify at 6% (since it’s higher than 5.25%).
Impact on Borrowing Power
- Reduces the maximum mortgage amount you may qualify for, as you must show you can afford higher payments.
- May require a larger down payment or a lower purchase price to pass the test.
- If you are close to your maximum budget, the stress test may push you over your limit.
Debt Service Ratios
The stress test affects how your debt service ratios are calculated:
- Gross Debt Service (GDS) Ratio: Share of income for housing costs (max 39% for insured mortgages).
- Total Debt Service (TDS) Ratio: Share of income for all debt payments (max 44% for insured mortgages).
- These ratios are calculated at the higher, stress-tested rate, not your actual mortgage rate.
When the Stress Test Applies
- New mortgage applications (both insured and uninsured)
- Refinancing your home
- Switching lenders (except for straight renewals with the same lender)
- Taking out a home equity line of credit (HELOC)
"You’ll face a mortgage stress test if you refinance your home, take out a homeowner line of credit, or switch to a new lender (but not if you renew with the same lender)."
Provincial Variations and Non-Bank Lenders
- Federally regulated lenders must apply the stress test. Some credit unions and provincially regulated lenders may use more flexible criteria.
- Check with your lender to confirm their policies if you’re outside of a major bank or in a province with unique regulations.
Comparison Table: Stress Test Rate vs. Offered Rate
| Offered Mortgage Rate | Stress Test Rate (Offered + 2%) | Bank of Canada Qualifying Rate | Rate Used for Stress Test |
|---|
| 3.50% | 5.50% | 5.25% | 5.50% |
| 4.00% | 6.00% | 5.25% | 6.00% |
| 5.49% | 7.49% | 5.25% | 7.49% |
| 2.00% | 4.00% | 5.25% | 5.25% |
First-Time Homebuyers and Government Programs
- First-time buyers must also pass the stress test.
- Programs like the First-Time Home Buyer Incentive and Home Buyers’ Plan (HBP) can help with down payments, but do not affect the stress test calculation.
- The amount you qualify for may be less than anticipated, so factor in the stress-tested rate when planning your purchase.
Recommendations and Next Steps
- Calculate your affordability using the stress test before house shopping.
- Consult your lender or broker to fully understand the impact on your borrowing capacity.
- For the most competitive rates and a streamlined application, use theratefinder, which helps Canadians compare mortgage rates for residential, commercial, and construction loans with a multi-step application process. Start your application at theratefinder.ca/onboarding for a personalized mortgage solution.
Summary
The Canadian mortgage stress test is a crucial requirement for anyone applying for, refinancing, or switching a mortgage. It ensures borrowers can withstand potential interest rate increases, safeguarding both individuals and the broader housing market. Always assess your finances using the stress test rate and consult with professionals to optimize your mortgage approval chances.