The Canadian mortgage stress test, explained

“It applies to everyone—you, me, first-time buyers and 10-time buyers,” says Maxine Crawford, a mortgage broker who serves the Greater Toronto Area (GTA) and elsewhere in Ontario. “That includes people who already own a home and need to refinance their mortgage.”

In spite of its broad application, many Canadians may not be aware of the stress test or don’t understand how it works. Here’s what you should know before you apply for your next home loan.

What is the mortgage stress test?

First off, it’s not a test like the kind you encounter in school. Rather, it’s a set of rules major banks must use to determine if you qualify for a mortgage. Because mortgage rates can fluctuate, as they have in recent months, the Canadian government has set a minimum qualifying rate to reduce the risk involved in mortgage lending. This helps to ensure you’ll still be able to afford your mortgage payments if interest rates increase beyond the rate originally stated in your contract. In other words, it’s not you but your finances that are put to the test.

How does the mortgage stress test work?

When you apply for a mortgage, the lender will offer you a contract interest rate based on current market interest rates (which follow changes in the economy), the characteristics of your mortgage and your credit history. (Here’s what influences five-year fixed and five-year variable mortgage rates, for example.) 

Under the stress test, however, your contract rate is not the rate the lender will use to determine your mortgage eligibility. Rather, it will make those calculations at a higher interest rate, to ensure you’ll be able to make your payments if or when rates go up. 

What is the mortgage qualifying rate in Canada? 

The mortgage qualifying rate refers to the rate at which you need to pass the stress test. Since June 1, 2021, the minimum qualifying rate for mortgage applicants is the higher of the following: 

• The rate offered by your lender plus 2%; or
• 5.25%

To put this into real terms: Let’s say you wanted to borrow $400,000, and your lender offered you a five-year fixed rate of 4.0% with a 25-year amortization. You would have to prove you can afford a mortgage payment of about $2,560 per month (calculated at 6.0%), even though your actual monthly mortgage payment (at 4.0%) would be considerably lower (about $2,150).

Why was the mortgage stress test created?

The Canadian mortgage stress test first came into effect in 2016. At the time, it only applied to insured mortgages—loans for homes whose buyers had a down payment of less than 20%—which meant the applicants were required to get mortgage default insurance. With Canadians experiencing high levels of household debt, the goal was to create a financial buffer for buyers facing a greater risk of not being able to make their mortgage payments in the future.

“The stress test was introduced to add a margin of safety to ensure borrowers could make their payments if they faced a change in circumstances—such as if interest rates go up or their income changes,” says Crawford. 

In 2018, the stress test was expanded to include buyers with more than a 20% down payment (those with uninsured mortgages). Since then, all Canadian home buyers applying through a federally regulated lender—as well as those refinancing their current mortgage—have been required to pass the test.

Has the stress test changed over the years?

Yes. The stress test has evolved in a couple of ways, including changes to the qualifying rate itself, and how the rate is applied.

Until June 2021, the stress test rate was set at either 2% above the contract rate that buyers negotiated with their lender, or at the posted Bank of Canada (BoC) five-year rate, whichever was higher. However, when the BoC slashed rates at the onset of the COVID-19 pandemic, there were concerns that its five-year benchmark rate was too low to adequately protect borrowers from defaulting on their mortgages in the future.

So, the Office of the Superintendent of Financial Institutions (OSFI), a federal government agency that acts as Canada’s banking watchdog, decided to decouple the minimum qualifying stress test rate from the central bank’s rates, and instead use a set floor rate that is reviewed annually.

Another change has to do with mortgage renewals. Previously, if borrowers wanted to move their mortgage to a different federally regulated lender at renewal, they needed to “pass” the stress test again as a new applicant. In late 2023, however, the federal government eliminated that requirement on insured or high-ratio mortgages, as part of the Canadian Mortgage Charter. And as of Nov. 21, 2024, borrowers with uninsured mortgages will also be able to switch lenders at renewal and qualify based on market interest rates, rather than the stress tested rate.

“This is a very good thing,” says Crawford. “Borrowers will be able to qualify at the contract rate, which means they can shop around at renewal instead of just accepting whatever their current lender is offering.”

It’s important to note, however, that borrowers who are refinancing their mortgage—meaning, they want to change the terms of their mortgage contract, say, to extend the amortization period or to borrow extra money against the home’s equity—must pass the stress test again with either their current lender or a new one.

What does the stress test mean for borrowers?

The stress test reduces the size of mortgage that buyers can qualify for, says Crawford. So, unless you are able to come up with a bigger down payment to make up the difference, the test also lowers your maximum purchase price. 

For example, if there were no stress test at all, a borrower with an annual household income of $135,000 and a minimum down payment could qualify to purchase a $750,000 home (assuming an interest rate of 4.0% and a 25-year amortization). But adding the extra 2% buffer for the stress test, the same borrower’s buying power drops to only $630,000, Crawford says. “As a result, the stress test often also impacts the type and/or location of the property that borrowers can purchase,” says Crawford. 

Is there any way to avoid the stress test?

No, there isn’t. Canada’s big banks are mandated to enforce these rules for all mortgage borrowers. And there’s no way to avoid the stress test if you’re getting an insured mortgage from any lender. 

For uninsured mortgages, however, lenders that are provincially rather than federally regulated—such as credit unions—can use a lower qualification rate than is mandated by the stress test. So, for example, they might allow a borrower with an excellent credit score to qualify at 4.75%, instead of 6.75% (in other words, eliminating the extra 2% stress test buffer). But the mortgage contract rate is likely to be significantly higher than the most competitive rates available. “Basically, you pay for the privilege of qualifying at a lower rate,” says Crawford.

Otherwise, borrowers looking to increase home affordability can work to lower their amount of other personal debt or get a co-signer to qualify for a larger mortgage.

How to calculate what you can afford with the mortgage stress test

Before speaking to a lender or broker, you can use online tools to calculate your mortgage affordability. The government of Canada’s mortgage qualifier tool, for example, will tell you whether you are likely to qualify for a certain mortgage amount, using the stress test rules.

Similarly, a mortgage affordability calculator looks at the maximum mortgage you can borrow based on the same qualifying criteria. 

More on mortgages:

• Why the mortgage stress test isn’t the villain it was made out to be
• 7 smart strategies for first-time home buyers
• How much you need to earn to afford a home in Toronto and the GTA
• Find the best mortgage rates in Canada
• Mortgage renewal calculator

About Justin Dallaire

Justin Dallaire is the senior editor at MoneySense.ca. He was previously an editor at Strategy magazine and has a master’s degree in journalism from Toronto Metropolitan University.

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