How to Stress Test Your Mortgage in Canada

Thinking of taking out a mortgage to buy a house of your own, but you are not sure you can afford it in the long run? In that case, you need that mortgage to be stress tested to make certain that you will not run into any serious financial crisis in the future. We are going to tell you everything essential to know about the mortgage stress test and how it’s done.

What Is The Mortgage Stress Test In Canada?

The Canadian mortgage stress test was introduced by the Office of the Superintendent of Financial Institutions (OSFI) in 2018 in order to stop home buyers from borrowing too much money to handle.

Basically, it is designed to determine if you, the borrower, can still afford to pay the mortgage if interest rates rise in the future or if your financial situation changes in any way.

How Does the Mortgage Stress Test Work?

As an example, in Canada, lenders will check to see if you are qualified for a certain mortgage by stress testing, using either higher interest rates than the actual rate (interest rate + 2%) or the benchmark rate specified by the Bank of Canada, whichever is the bigger percentage.

As of 2025, the Bank of Canada has set the standard mortgage rates in Canada to 5.25%. So, the lender will assess your financial status (income, debt, etc.) and presume a higher interest rate than normal to see if you would still be okay financially.

Let’s have a look at an example to fully understand how it all works:

Mortgage Stress Test Example

1. Let’s say you want to take on a mortgage of $300,000. The interest rate on the loan is 4%.

2. When the lender wants to see if you are qualified for this mortgage, in their calculations, they assume that the interest rate is higher; how much higher? Well, the official rate is 5.25%; on the other hand, the lender-determined rate is 4%, so the stress rate would be 4 + 2 = 6%.

3. The lender will use the higher rate, meaning the 6%.

4. This is the interest rate they will check to see if you will be able to afford with your current salary.

5. If your mortgage affordability is low, you will have to take a smaller loan or look for a new lender.

6. But mortgage qualification in Canada is a little more complicated than that; it’s not just your salary that matters, the lender assesses your GDS and TDS as well.

What Are GDS & TDS?

• Gross Debt Service (GDS) Ratio: (Housing costs ÷ income) * 100 < 39%

This means that in order to qualify for the mortgage, the lender will calculate all your monthly housing costs, including the mortgage payment, property taxes, and all your house bills, like the heating, etc.

Then they multiply the given number by 100 and then divide that by your monthly income; if all those costs add up to less than 39% of your income, you have a good chance of getting that mortgage.

• Total Debt Service (TDS) Ratio: Debts + housing costs ÷ income < 44%

TDS is all about your different kinds of debts, plus all the housing costs mentioned in the GDA.

Your debts include things like car loans, personal loans, student loans, credit card payments, etc. TDS must be lower than 44% in order for you to have a good chance at qualifying for that loan.

We are going to discuss mortgage renewal briefly in the next part, but if you want to explore it in detail, Mortgage Renewal in Canada is a great read.

Stress Test Rules for Different Mortgage Types

Depending on the mortgage type and the situation, the rules of stress testing are a bit different. There are two main types we will discuss here; the rest we have elaborated on throughout this article.

1. Insured Mortgage

In this type of mortgage, you pay less than 20% of the house purchasing price, and the rest will be provided by the loan, but in order to do that, you also have to pay for mortgage default insurance provided by CMHC, Sagen, or Canada Guaranty.

The lender will arrange the mortgage default insurance for you and usually adds the cost to your mortgage principal.

So basically, the less down payment, the more your monthly payment will be. The stress test rule in this type of mortgage is that you must qualify at the higher of the Bank of Canada’s benchmark rate (currently 5.25%) or your contract rate + 2%.

2. Uninsured Mortgage

In this type of mortgage, you make a down payment of at least 20% of the house purchasing price, and you will not need mortgage insurance in order to qualify.

The stress test rule is the same as the previous type, meaning qualifying at either a 5.25% interest rate or your lender’s rate + 2%, whichever is higher.

Who Needs to Pass the Mortgage Stress Test?

Here is a breakdown of all types of people who are subject to the mortgage stress test:

1. First-Time Home Buyers

If it is your first time buying a house of your own and you want to take a mortgage from a federally regulated lender (e.g., banks and credit unions), you are obligated to pass the test.

Also, something to note is that it doesn’t matter if the downpayment of the mortgage is below or above 20%; if it’s your first house, you have to qualify based on the higher interest rate.

2. Mortgage Refinancing

If you intend to refinance your mortgage for any particular reason (for instance, to raise the loan amount for the purpose of house renovations), you might have to pass the test again, depending on the rules of your lender and their flexibility.

3. Mortgage Renewal Stress Test

If your mortgage term has come to an end and you want to renew it with a new lender, you typically need to pass the test again (no stress test if you are going to stay with the same lender).

However, on November 21, 2024, OSFI made an announcement regarding mortgage renewal stress test and made some mortgage stress test changes in Canada, stating that if you are renewing your mortgage and switching from a federally regulated lender to another federally regulated lender, and you are not asking for an increase in the loan amount or the amortization period, you will no longer have to pass the stress test again.

*A quick explainer: the mortgage term is the length of your current mortgage contract (usually between 1 and 5 years), and the amortization period is the total number of years it is going to take for you to completely pay off the mortgage (e.g., 25 years).

4. Self-Employed Buyers

People who do not have a job with insurance have to prove that they have a stable income to pass the test, but even then, they might face some more difficult mortgage terms.

5. Anyone Who Borrows From Federally Regulated Lenders

Simply put, anyone who goes to a federally regulated lender has to pass the stress test.

You can only receive a house loan without passing the stress test if you go to some private lenders or provincially regulated lenders (who usually have higher interest rates or stricter conditions and terms), since some of them use the stress test just like the federally regulated ones.

Make sure to check out down payment requirements in Toronto. A down payment is an important part of the whole mortgage process.

Why Is The Mortgage Stress Test Important?

There are a few reasons, significant ones, regarding why countries like Canada have implemented this system:

• Safeguarding borrowers: The mortgage stress test makes sure that home buyers are not going to run into any financial problems in the future in case of any negative changes, such as Bank of Canada rate hikes, losing jobs, a decrease in salary, an increase in general expenses, etc.
  
  If they can not afford to pay their mortgage, they might lose their house. It also makes sure that they are not taking too big of a bite, meaning a loan that is simply too expensive for them and is considered overborrowing.

• Protecting the economy: If too many people default on their mortgages at the same time when, for example, interest rates skyrocket or many borrowers lose their jobs, that could have a serious effect on banks, lenders, and financial institutions.
  
  If the numbers are too high, it could harm the country’s economy and even lead to an economic crisis.

• Preventing overpriced housing: In overheated markets like Toronto and Vancouver, too many people were taking loans that were too large, and that has led to a dramatic rise in housing prices.
  
  The mortgage stress test alleviates that issue by making sure only certain people get approved for mortgages, namely those who would be okay handling the mortgage payments if interest rates went up.

Regarding the impact of stress test on mortgage approval, the test has made the process more difficult, especially for first-time buyers, and has lowered the loan amount that homebuyers can qualify for by approximately 20%.

It is important to note that there are also private lenders who might not even stress test your mortgage, but their interest rates are usually higher than the federally regulated ones.

FAQs

1. How do you pass a stress test for a mortgage?

There are several things you can do before applying for a mortgage so that your chances go up:

• Pay off your existing debts.

• Increase your salary.

• Improve your credit score by paying your bills on time and using other methods.

• Be patient, save up more money, and make a larger down payment.

• Choose a longer amortization period.

• Maybe go for a smaller house or a smaller loan.

• Consider having a co-signer.

2. Is Canada getting rid of the stress test?

As of May-June 2025, no, the stress test remains in place.

However, there have been talks at the OSFI about an alternative that would say that banks would only be able to lend a certain amount of money to those people who have too much debt and whose loan-to-income (LTI) ratios are not looking promising. So basically, they would try to regulate lenders instead of individual borrowers and homebuyers.

3. How to avoid a mortgage stress test?

In most case scenarios, you can not avoid the test. The only way to avoid the stress test is to find a private lender that does not require you to pass the test.

You also don’t need to pass the test if you are renewing the mortgage with the same lender or another federally regulated one (explained in detail in the Mortgage Renewal Stress Test section in the article).

4. What happens if I fail my stress test?

In that case, you need to reapply for a smaller loan or choose a more affordable house. If you are not comfortable with those options, you can look for new lenders or improve your financial situation in order to qualify for the loan with your desired amount.

5. Is the stress test the same for fixed-rate mortgages and variable-rate mortgages?

Yes, but lenders who provide mortgages with variable interest rates typically have stricter qualification requirements.

6. How can I find out if I am going to pass the test?

You can either consult a mortgage broker or use online tools that are called mortgage affordability calculators.

All in All

By now, you should be good to go on your mortgage stress test since you know almost everything you need to know regarding the subject. The test is generally a good thing, but not everyone agrees with that, and some believe that it hurts first-time home buyers who are usually not very financially capable and need bigger loans to afford their dream house. Either way, the test is a governmental rule, and everyone has to accept it and prepare for it before applying for a mortgage.