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

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.)

When do you need to be mortgage stress-tested?

A mortgage stress test is applied by traditional lenders for:

• New home purchases, for any rate type (variable or fixed) or term length
• Refinances
• Some uninsured renewal switches (between lenders), for example, that involve an increase in mortgage amortization or balance

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
• Securing your best-possible rate
• 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.

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?

This year, OSFI suddenly dropped the stress test requirement on straight, stand-alone uninsured mortgage renewal switches (meaning amortization and mortgage balance aren't being increased), effective November 21, 2024.

Read our blog, Keeping up with Mortgage Rules, for the latest rule-change news or proposals.

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 (see our affordability calculator for an idea)
• 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!