Wait, is the mortgage stress test going away in 2025??

There's a good possibility it is — for uninsured mortgage approvals.

What replaces it may still impact your mortgage size and payments. Here's how it could work.

Apr 14, 2025

So long, farewell?

After much ado about the federal mortgage stress test (for years now), OSFI may decide to bid adieu to this regulation by the end of 2025 (for uninsured mortgages).

This potential mortgage change is not an 'in-your-mortgage-face' OSFI proposal.

Instead, it would result from fully adopting the bankside LTI (loan-to-income) portfolio limit regulation that OSFI introduced earlier this year, eliminating the need to regulate the borrower side of these mortgage approvals altogether.

Would uninsured mortgage borrowers notice a difference? Likely only indirectly. Some may see lower rates on stronger applications, and those with higher loan-to-income ratios might find that a particular lender is offering a higher mortgage rate or denying their mortgage approval.

Here are the 'no stress test' details that could impact your mortgage loan and payments.

"OSFl's job is to regulate financial institutions, not Canadians."
- Peter Routledge, OSFI Superintendent, 2024 Global Risk Institute Annual Summit, October 2, 2024

Why is there a mortgage stress test?

The OSFI (Office of the Superintendent of Financial Institutions) first introduced its mortgage stress test in 2016 and has seen changes along the way to help protect lenders from over-leveraged mortgage loans, both insured and uninsured.

This test limits a mortgage loan based on the borrower's ability to handle mortgage payments at 2% higher than the contract rate (or a minimum of 5.25%, whichever is greater). Despite its unpopularity among Canadian homeowners, it did help protect many from mortgage default as interest rates skyrocketed between 2022 and 2024.

In 2024, as interest rates declined, it was withdrawn for most insured and uninsured straight mortgage renewal switches.

OSFI looking to get out of the borrower side.

The borrower-side mortgage stress test was deemed relatively successful in protecting many borrowers and the system from widespread default as interest rates rose.

However, OSFI’s own analysis revealed the stress test didn't deliver the banking higher-risk portfolio management it was hoping for, admitted by OSFI superintendent Peter Routledge in an October 2024 memo: "It really didn't stop a very substantial build-up in mortgages with very high loan-to-income ratios, which I define as 450% loan-to-income (LTI) and greater."

As well, this federal agency doesn't relish the perception that it's responsible for managing a borrower's details, rather than sticking to the institution end of things. "It feels to the borrower like it's OSFI regulating them individually ... and that is not the intent Parliament has ever set for OSFI," stated Routledge.

Borrower payment limits aren't enough to protect banks.

"When interest rates are low, the borrower mortgage stress test could be considered too easy to pass."
– Dan Eisner, founder and CEO of True North Mortgage

When interest rates are low, borrowers' payments could pass the stress test even though they have a higher LTI, creating the conditions for lenders to quickly accumulate higher (uninsured) LTI loans.

But when interest rates and mortgage payments rise, those high-LTI loans now pose a greater risk to a lender's bottom line.

Here's a quick illustration of how rising interest rates increase the bank risk on high LTI loans:

At a low benchmark interest rate of 1.5%, a borrower with a $500K uninsured mortgage, 30-year amortization, and 600% LTI ratio passes OSFI's stress test due to the lower interest-rate effect on their payments
The benchmark rate goes up to 3.5%, but this borrower's income doesn't rise accordingly
Despite passing the stress test at the beginning of their term, they can no longer afford to cover those higher payments at renewal (over $500 more per month)
The bank now needs to withhold more capital to cover the increased risk of default for all their higher LTI mortgages
The thicker the high-LTI portfolio file, the more capital needs to be retained

If a lender doesn't retain enough capital (or takes too long to retain it) to cover the LTI risk, the bank system's safety could be undermined — especially if economic conditions deteriorate quickly and widespread default suddenly becomes a reality.

This potential scenario is exactly what sparked the 2008–2009 Financial Crisis. In 2007, U.S. banks' high LTI mortgage exposure began to surface and helped trigger a global economic meltdown.

With interest rates going lower again, OSFI is now looking to reform its regulations beyond a stress test that only regulates borrower payments.

Shifting from individual limits to bank portfolio limits.

Under the bankside LTI regulation imposed earlier this year, OSFI uses a general 15% to 25% portfolio limit rule to restrict a bank's underwriting of mortgages over 450% LTI.

Each bank receives its own percentage limit based on its unique lending environment and is assessed quarterly, with repercussions for exceeding its limit.

OSFI will assess this program for up to a full year before deciding to remove the individual stress test.

It is proceeding with care to ensure that this new tactic effectively balances a bank's ability to react to market instability with the goal of maintaining a healthy, accessible housing market.

How could the stress test removal affect you?

If OSFI is making changes to help banks better manage risk, it stands to reason that the bankside LTI portfolio limit could result in some uninsured mortgage clients seeing higher rates based on their debt-to-income ratios, while others may find it easier to qualify for a mortgage with the stress test removed.

Mortgage lenders may offer more competitive rates for lower LTI mortgages or clients with lower debt ratios
Buyers in higher-priced housing markets, like in BC or ON, may have to make more income or find a lesser-priced home to secure a mortgage loan
The same affordability-challenged buyers may face higher mortgage rates if a lender does offer mortgage approval
Higher leveraged home buyers may require a mortgage solution in the alternative lending space if they can't find traditional mortgage approval

Would you ever know if a bank is over its 450% LTI limit?

No. Lender by lender, a mortgage client would never be aware of a bank's strategic lending practices.

This OSFI LTI regulation and its details are legally private. Banks are not allowed to disclose their financial situation or portfolio details, nor is OSFI allowed to share this information publicly.

Uninsured mortgages rule in Canada.

Removing the stress test requirement for all uninsured mortgage applications would affect the majority of Canadian mortgages — about 70% are uninsured.

An uninsured mortgage isn't covered by default insurance. It typically carries a down payment or home equity portion that is 20% or greater of the home's market value.

Because of the increased risk of mortgage default, these mortgages typically carry higher mortgage rates than insured mortgages. This risk factor also requires more stringent OSFI oversight to help protect Canada's banking sector.

Will OSFI keep the stress test for insured mortgages?

Insured mortgages are also called high-ratio mortgages. These mortgages tend to have higher LTI ratios, but banks are protected against borrower default by the (government-backed) insurance.

That doesn't mean that insured borrowers have free reign to default on their mortgages or that banks can just hand out higher-leveraged insured mortgages and collect insurance all day long (in the event of default), which is why the OSFI's federal stress test will still be used for insured mortgage purchases to help protect both borrowers and banks for the foreseeable future.

Homeowners with insured mortgages who want to switch lenders at renewal aren't required to undergo the stress test to qualify (unless they want to refinance).

Will OSFI find a bankside way out of the stress test for all insured mortgage qualifications? If they want to stop the perception of policing borrower-side mortgage details, they may turn to this mortgage set next.

Could the borrower stress test reappear if rates go up?

Not likely, as OSFI is making this change specifically to enable better banking sector protection amid the potential for volatile interest rate trends.

When could this stress test change come into effect?

OSFI meets to discuss main proposals and changes typically in December each year for what it may want to enact in the upcoming year. Proposed rules can be deemed to take effect anytime, depending on the time OSFI needs to survey opinions and potential effects.

In this case, the stress test could be removed for all uninsured mortgages in the 3rd or 4th quarter of 2025, or it may decide to enact it early in 2026.

Keeping Track of Mortgage Rule Changes

When OSFI closes a door, somewhere it opens a window.

OSFI's bankside change — which may affect a mortgage approval depending on the lender — means that consulting an expert mortgage broker for your best rate and lender is more important than ever.

If the stress test removal goes through (many in the industry suspect it will), every mortgage lender will offer rates according to their portfolio balance, and you won't know which ones have the best rates to offer you.

A highly trained, salaried True North broker can shop the lenders and products on your behalf to ensure you have not only the best rate for your unique situation but also the flexible mortgage features to go with it to save you cash later if you need a change.