What is the Canadian mortgage stress test?

If you already own a home, or you're planning to buy your first place in the next few years, it’s important to better understand the Canadian mortgage stress test, one of the most important rules around mortgages in Canada.

The mortgage stress test was introduced in 2018 by the Office of the Superintendent of Financial Institutions (OFSI) — a federal bank regulator. The mortgage stress test is designed to make sure that borrowers can afford their mortgage payments, and to prevent Canadians from taking on too much debt when buying a home or refinancing their current mortgage.

To qualify for a mortgage from a bank, you'll need to pass the mortgage stress test. To do this, home buyers and homeowners who are refinancing need to prove that they can afford a mortgage at a rate higher than the one that they're approved for.

We'll walk you through what you need to know and how to calculate what that means for you.

Since June 2021, the rules for the mortgage stress test have meant borrowers have to be approved for a rate of either the interest rate they were approved for by their lender plus 2%, or 5.25% (the minimum qualifying rate), whichever is higher. This rate can be referred to as the “stress-tested rate”.

For example, if you’re approved for a mortgage at an interest rate of 3%, you’ll have to prove that you can also be approved for a mortgage with a 5.25% rate. But if you’re approved for a mortgage at an interest rate of 4%, you’ll need to prove you can also be approved for a mortgage with a 6% rate.

All default insured and uninsured borrowers need to pass the mortgage stress test. The mortgage stress test also applies if you’re:

• Purchasing a home
• Refinancing
• Changing mortgage lenders
• Taking out a second mortgage
• Applying for a home equity line of credit

But if you’re simply renewing your mortgage with the same lender, you won’t need to go through the stress test again.

The mortgage stress test was introduced because there were concerns that the amount of mortgage debt that consumers were taking on was growing too large and too quickly in Canada, and could be a risk to the country’s overall economic stability.

Some Canadians were also taking out additional lines of credit on their home equity, leading to high debt levels compared to their income. As these factors increase, so could the likelihood of mortgage defaults when interest rates increase. The stress test helps determine if borrowers will be able to afford their mortgages even if interest rates rise.

The stress test means that borrowers aren't able to qualify for as large of a mortgage loan as they previously did before the stress test was implemented. It may also slow the rise of home prices by limiting how much buyers can qualify for a mortgage. It can also better protect homebuyers if interest rates increase.

Lenders qualify you for a mortgage based on two formulas: the gross debt servicing ratio (GDS) and the total debt servicing ratio (TDS).

The GDS measures how much housing costs you'd be taking on in comparison to your income. The TDS measures how much housing debt you'd be taking on in addition to all your other current debts in comparison to your income.

In most cases, for the GDS, no more than 39% of your household's gross annual income should go to housing expenses, including your mortgage payment (at the stress-tested rate), property tax, heat and half of condo maintenance fees.

For the TDS, all your debt repayments, such as mortgages (at the stress-tested rate), credit card balances, car loans and student loans, should be less than 44% of your household's gross annual income (that percentage can vary depending on your credit rating and other factors).

Both the GDS and TDS ratios may vary based on your lender and/or default insurer (and change over time). The default mortgage insurance providers in Canada — Canadian Mortgage and Housing Corporation (CMHC), Sagen and Canada Guaranty —have different qualification policies. You will need to get mortgage default insurance if you put less than 20% of the purchase price down as a down payment. And all three of these insurers have declared that properties costing $1 million or more aren't eligible for mortgage default insurance. Learn more about mortgage default insurance here.

When you also factor the stress test into the equation, your income doesn't stretch as far. The stress test will reduce the amount of mortgage loan you qualify for, which means you'll have less money up front to buy a home.

Critics of the mortgage stress test point out that it affects first-time homebuyers the most and may mean they miss out on entering the real estate market.

First-time homebuyers usually have much smaller down payments as they haven't yet had the opportunity to built up equity in a previous house. They only have what they've saved or what they’re gifted. The smaller the down payment, the bigger the mortgage they'll need and the more they'll need to qualify for.

Want to better understand what you'll qualify for? You can get an idea by using a mortgage stress test calculator from the government. With this calculator, simply add in some details about your personal financial situation and it calculates the amount for you.

For example, here's one homebuyer's situation that we tested with the calculator:

• $500,000 property
• 20% down payment
• 5.25% annual interest rate
• 25-year amortization period
• 5-year mortgage term
• Monthly payments
• $150,000 gross household income
• $350 in additional monthly expenses
• $450 in monthly debt payments

The results from this calculator show that this borrower would likely be approved for this requested mortgage since their GDS is 21.87% and their TDS is 25.47%.

Didn't qualify for a mortgage for the amount you wanted to borrow after the stress test? There are a few things you can do:

While an online calculator is helpful in understanding your likelihood of passing the stress test, you'll need to apply for a mortgage or get pre-approved to know for sure what amount of a mortgage loan you'll qualify for. You'll also learn what interest rate you're approved for and you can use actual rather than estimated numbers in the calculation.

If you're unable to qualify for a mortgage based on the stress test, you can check out our special mortgage programs or explore options like saving for a bigger down payment or choosing a lower-priced home.