The mortgage stress test is the mortgage rate qualification rule under OSFI Guideline B-20. It requires homebuyers to qualify for a mortgage at an interest rate higher than they will actually pay to buffer for future rate increases that may occur over the mortgage term.
Implemented nationally in 2018, the mortgage stress test has become an integral part of the mortgage approval process, transforming housing affordability and purchasing power for an entire generation of Canadian homebuyers.
Mortgage Stress Test
How is the stress test calculated?
When applying for a mortgage, the stress test interest rate is determined as follows:
- Determine your contracted mortgage interest rate offered by the lender
- Add two percentage points to that contracted rate
- Compare the sum to the current stress test minimum rate set by OSFI, currently at 5.25%
- The higher of the two rates is your stress test rate
For example:
- If your contracted rate is 4.55%, your stress test rate is 4.55% + 2% = 6.55%
- If your contracted rate is 5.10%, stress test rate is 5.10% + 2% = 7.10%
- In both cases, the calculated rate exceeds the 5.25% minimum, so the higher calculated rate is used.
By testing mortgage affordability at a higher rate, borrowers are proven to have a cushion in case rates rise in future before they renew. This promotes responsible borrowing by preventing Canadians from taking on excessive housing debt relative to income, thus protecting both the lender and borrower. (source)
When is the mortgage stress test applied in Canada?
The stress test applies to most situations, including purchasing a home, refinancing, switching lenders, and taking out a HELOC. Renewing with the same lender is exempt.
- Purchasing a home: All borrowers are stress tested when purchasing a home, whether making a down payment above or below 20% of the price.
- Mortgage refinancing: Borrowers must redo the stress test when refinancing an existing mortgage, whether with their current or new lender.
- Obtaining a HELOC: Taking out a new home equity line of credit requires passing the stress test again.
- Renewing and switching enders: Stress test applies if you switch your existing mortgage to a new lender unless you are renewing an insured mortgage.
- Uninsured mortgages (down payment over 20%) MUST redo the stress test when switching lenders on renewal.
- Insured mortgages (down payment under 20%) do NOT require re-testing when switching lenders at renewal.
This nuance is due to the insured status keeping the risk with the mortgage insurer.
How does the mortgage stress test impact mortgage affordability?
The stress test reduces the maximum mortgage amount and home price a borrower can qualify for. For example:
| Without a mortgage stress test | With a mortgage stress test | |
| Mortgage Rate | 4.5% | 6.5% |
| Max Home Purchase Price | $500,000 | $430,000 |
| Down Payment (20%) | $100,000 | $86,000 |
| Mortgage Required | $400,000 | $344,000 |
In this example, the stress test rate increases the required down payment amount by $14,000 and decreases the maximum qualified home price by $70,000 for this hypothetical buyer.
When tested at a lower rate, their income can support a higher-priced home. But under the stress test, buyers are forced to opt for a lower-priced property or save a larger down payment.
The stress test also significantly impacts the purchasing power of first-time home buyers. Consider first-time buyers have smaller down payments, relying heavily on insured mortgages, but they must still qualify at much higher stress test rates with these smaller down payments. The impact is that some first-time buyers may be priced entirely out of the market, while others must settle for far lower-priced properties than expected, making home ownership unattainable for many younger Canadians looking to enter the market.
How to evaluate stress test readiness before applying?
Prospective buyers can evaluate their mortgage eligibility and stress test readiness in 3 ways before actual application:
- Online mortgage affordability calculators: Use our tools to input personal financial scenarios to estimate maximum approval amounts and required down payments.
- Mortgage pre-approval with broker: Reputable brokers offer pre-approvals to assess affordability and provide the maximum mortgage you qualify for.
- Review budgets and credit: Buyers should optimize their budget and credit score before applying, as both impact rates offered and stress test outcomes.
Getting pre-approved provides the most reliable estimate of the stress test’s approval amount and qualification.
Do NOT pass the mortgage stress test – What to do?
For hopeful buyers who don’t qualify for their desired mortgage amount under the stress test, there are some options:
- Increase down payment: Contributing more upfront lowers the mortgage required. This improves the chances of meeting debt ratios at higher stress test rates.
- Improve credit score: A higher score qualifies borrowers for lower interest rates. Since the stress test rate is a set premium above the contract rate, improving credit to get better contract rates makes passing the stress test easier.
- Purchase lower-priced property: Opting for a less expensive property lowers the borrowers’ required mortgage amount to qualify for.
- Alternative lenders: Certain credit unions or private lenders may provide mortgages without requiring the federally mandated stress test.
- Renew with existing lender: Mortgage renewal with an existing insured or uninsured lender does not require another stress test.
Coming up with a larger down payment through added savings, gifts, or other means is generally the simplest option. The lower mortgage required will increase the chances of qualifying under the strict stress test.
Potential future changes for the mortgage stress test
While not expected to be abolished, there are certain potential changes policymakers are considering for the stress test policy:
Waiving the mortgage stress test for uninsured renewals
This would exempt borrowers who switch lenders at renewal but have 20%+ equity from redoing the stress test. Proponents argue this encourages competition between lenders.
However, Canada’s banking regulator indicated there would be no imminent changes to the stress test requirements despite acknowledging that the mortgage stress test is applied unequally to certain homeowners renewing their mortgages.
Find out what happens if your mortgage renewal is denied to have better preparation for your plan.
Updating the minimum qualifying rate more frequently
OSFI reviews the defined minimum stress test rate annually. More frequent adjustments could allow it to track market shifts better. Overall, significant changes are viewed as unlikely in the near term. Modest adjustments may be implemented to balance prudence and flexibility amidst critics and advocates.
FAQs on Canadian mortgage stress test
How is stress test rate calculated?
It is the greater of the borrower's contracted rate + 2% or the OSFI minimum stress test rate, currently 5.25%.
How does mortgage stress test impact maximum borrowing?
It lowers the maximum mortgage amount and purchase price qualified for by testing affordability at a higher rate.
First-time home buyers affected most by stress test?
Yes, first timers with smaller down payments rely on insured mortgages but must still meet stringent stress test criteria.
What if you can't pass the stress test?
Options include a larger down payment, improving credit score, buying a lower priced property, or seeking alternative lenders.
Can borrowers avoid stress test?
Difficult, but possible by renewing with the same lender, provincially regulated lenders, private lenders, or 20%+ down.
Does mortgage stress test apply to refinancing?
Yes, it is required when refinancing a mortgage regardless of using existing or new lender.
How can you prepare for the stress test?
Improve credit, budget, down payment savings. Get pre-approved to confirm maximum borrowing.
Will the stress test be changed or removed?
Unlikely to be abolished but moderate tweaks are under consideration to improve flexibility.
The bottom line
The mortgage stress test is an established pillar of the home financing process, impacting millions of buyers. All prospective borrowers should understand the key aspects:
- Required by all mainstream regulated lenders when financing a home
- Reduces the maximum mortgage amount by testing on a higher hypothetical rate
- It can be very restrictive for first-time buyers with smaller down payments
- Work on improving credit, budgeting, and down payment savings before applying
- Get pre-approved to both confirm the true maximum amount and prepare documentation.
By understanding the policy and its rationale, you can best prepare yourself and work with mortgage advisors to craft strategies for maximizing affordability and overcoming the stress test on your home-buying journey.
