The Canadian Mortgage Stress Test

The OSFI Mortgage Stress Test helps mortgage lenders assess your long-term financial stability. Essentially, it’s a financial "what-if" scenario designed to determine whether you could still afford your mortgage payments if interest rates were to rise or if you faced unexpected financial challenges. This test might limit the amount you can borrow based on current rates or even prevent you from qualifying for a bank mortgage.

In simple terms, the Canadian mortgage stress test highlights the significant financial commitment of homeownership. So, how can you ensure you pass it?

What Is The Purpose Of The Stress Test?

The stress test was introduced by the Office of the Superintendent of Financial Institutions Canada (OSFI) and is designed for individuals borrowing from federally regulated lenders, such as banks. However, it may not apply to provincially regulated credit unions, private mortgage lenders, or B-lenders. The primary goal of the stress test is to prevent borrowers from taking on unmanageable debt by securing a mortgage that exceeds their financial capacity.

The test applies to all potential and current homeowners, including those with mortgage terms shorter than five years and those seeking conventional uninsured mortgages (with a down payment of more than 20%).

The only exemption is for homeowners renewing their mortgage with the same lender. However, if you choose to switch lenders during renewal, you will still be required to pass the stress test.

Get a free, no-obligation personal loan quote today, with rates starting as low as 9.99%!

You can apply without affecting your credit score.

Is The Stress Test Changing In 2025?

The Office of the Superintendent of Financial Institutions (OSFI), which oversees the stress test for uninsured mortgages, recently confirmed that the stress test rates will remain unchanged. Currently, the minimum qualifying rate is the higher of 5.25% or the contracted rate plus 2 percentage points.

Similarly, the federal government's Department of Finance, which sets the rates for insured mortgages, also announced that the minimum qualifying rate for insured mortgages will remain the same.

Compare rates & get your free credit score

Finding the best rate has never been easier

How to Prepare for the Mortgage Stress Test

While you can't control the benchmark rate or the rate your lender offers, having a basic understanding of the process can help. It's a good idea to speak with a mortgage advisor, mortgage broker, or real estate agent for personalized advice.

Pay Down Your Debt

Your lender will assess all your current debts to determine if you're eligible for a mortgage. Reducing your debt load can lower your TDS (Total Debt Service) ratio, improving your chances of approval.

Apply for a Smaller Loan Amount

Be realistic about what you can afford. Choosing a smaller loan will not only increase your chances of passing the stress test, but it will also leave you with more disposable income and help you avoid becoming house-poor.

Crunch Some Numbers

Consider whether you could comfortably afford an extra $500–$1,000 in mortgage payments if rates were to rise after you’re approved. This will give you a clearer picture of how your finances would hold up under stress test conditions.

Mortgage Stress Test Terms You Should Know

To better understand the mortgage stress test, it's important to become familiar with some key terms:

1. Interest Rate – This is the cost of borrowing money, expressed as a percentage of the loan amount.

2. Benchmark Rate – Canada's current benchmark rate is 5.25%. It’s the standardized rate lenders must use to qualify mortgage applicants across the country.

3. Qualifying Rate – A hypothetical rate determined by your lender to assess whether you could afford mortgage payments if rates were to increase.

4. Contractual Rate – The actual interest rate outlined in your mortgage agreement. This is the rate used to calculate your monthly mortgage payments.

How Is the Canadian Mortgage Stress Test Calculated?

The mortgage stress test determines if you qualify for a mortgage based on the minimum qualifying rate, which is the higher of:

• 5.25%, or

• Your contractual mortgage rate plus 2%.

Example Calculations:

• If your contractual mortgage rate is 3%, the lender will use 5.25% to qualify you since it is higher than 3% + 2% (5%).

• If your contractual mortgage rate is 4.5%, you will need to qualify using a rate of 6.5% (4.5% + 2%) because it is higher than the benchmark rate of 5.25%.

This formula applies to both insured mortgages (with down payments of less than 20%) and uninsured mortgages (with down payments of 20% or more).

How Much Can I Afford to Borrow for My Mortgage?

The mortgage stress test evaluates not only your ability to handle rising interest rates but also considers your overall debt profile. Two key ratios play a crucial role in determining your mortgage affordability:

1. Gross Debt Service (GDS)

   • This represents the percentage of your income allocated to housing expenses, including mortgage or rent payments, utilities, and property taxes.

   • Your GDS should be less than 39% of your monthly income.

2. Total Debt Service (TDS)

   • This measures the percentage of your income allocated to all debts, including housing costs and other obligations like credit card payments, student loans, and car loans.

   • Your TDS should be less than 44% of your monthly income.

By keeping these ratios within the recommended limits, you can better determine how much you can afford to borrow for your mortgage.

CHECK HOW MUCH YOU QUALIFY FOR

FREE 100% . NO OBLIGATION

Considering An Alternative Lender?

If you’re having trouble getting approved for a mortgage from a traditional financial institution or you’re interested in avoiding the stress test, you may want to consider choosing an alternative lender. Loans Canada can help match you with a licensed mortgage specialist who can best meet your needs.

Example of an Affordable Mortgage

Imagine you live in Ontario with a household income of $200,000 per year, monthly expenses of $3,652, and $60,000 saved for a down payment. You’re offered a 25-year mortgage with a 5-year term at a 7.25% interest rate.

How Much Mortgage Could You Afford?

Using the CMHC mortgage affordability calculator, you might qualify for a home worth up to $527,651.

However, this is a good time to assess whether you can sustain the mortgage payments in the future, especially as financial circumstances or interest rates change.

Is Household Debt in Canada a Concern?

The average Canadian household carries a debt-to-income ratio of 180%, meaning $1.80 is owed for every $1 earned. With rising interest rates, many potential homeowners could find themselves struggling to keep up with payments over time.

To address this, mortgage lenders and the OSFI carefully evaluate debt levels to get a comprehensive view of your financial stability both now and in the years ahead.

How to Stress Test Your Mortgage

Applying for a mortgage can be a challenging process, so it’s a good idea to stress test your own finances to identify areas that may need attention. Here’s how you can prepare and improve your chances of passing the stress test.

How Much Have You Saved for a Down Payment?

No matter if you can make a 20% down payment or not, you’ll still need to pass the stress test when applying with a federally regulated lender. Knowing how much you’ve saved for the down payment will help you understand the size of the mortgage you can afford.

Determine What Interest Rate a Bank Will Offer You

If you're just starting the home buying process, consider getting pre-approved with your bank. This will give you an idea of the interest rate you could qualify for.

Calculate the Monthly Mortgage Payment You Can Afford

Next, assess what monthly mortgage payment you can comfortably manage right now. With your down payment amount and interest rate, using a mortgage calculator can help you determine this.

Can You Afford Your Mortgage Payments If Interest Rates Increase?

The stress test evaluates how much you can afford if interest rates rise. To simulate this, calculate whether you can afford the mortgage payments with an interest rate of 5.25% or your contractual rate plus 2%, whichever is higher.

Use a mortgage calculator to determine your monthly payments at this higher rate and see if you can comfortably afford it.

Gross Debt Service Ratio (GDS)

Your GDS shows what percentage of your gross income goes toward housing expenses. This includes your mortgage, property taxes, utilities, and, if applicable, condo fees. Your lender will add all housing-related expenses and divide them by your gross monthly income. Ideally, lenders prefer your GDS to be no more than 39%.

Total Debt Service Ratio (TDS)

In addition to housing costs, your TDS reflects how much of your income goes toward paying all your debts. This includes car loans, student loans, credit card payments, lines of credit, and more. After adding up all your debts, your TDS should ideally be no higher than 44% of your gross monthly income to increase your chances of approval.

Can I Avoid the Stress Test?

No. The stress test is mandatory for federally regulated banks, but it doesn’t apply to private or alternative lenders, provincial lenders, or credit unions, which are not under the jurisdiction of OSFI. As a result, these types of lenders are not required to subject mortgage applicants to the same stress tests as traditional banks.

If you’re considering alternative lending options, subprime lenders may be a viable choice. However, it's important to note that these lenders typically charge higher interest rates than traditional banks. While you may have an easier time qualifying with a non-traditional lender, you should carefully consider the potential long-term costs before proceeding.

Stress Test FAQs

Can I Pass the Mortgage Stress Test?

To pass the mortgage stress test, you must show that you can still afford your mortgage at the qualifying rate, which is the higher of 5.25% or your mortgage contract rate plus 2%. Your GDS (Gross Debt Service) and TDS (Total Debt Service) ratios will be assessed based on this rate. If these ratios exceed the recommended limits, you’re unlikely to pass the stress test.

What Income Do You Need to Qualify for a $500,000 House?

According to the Government of Canada’s mortgage qualifier tool, you could qualify for a $500,000 house with an income of at least $200,000 per year, assuming you make a 20% down payment and qualify for a 5-year mortgage with a 5.25% interest rate amortized over 25 years. However, depending on your existing household debt and expenses, you might need a higher income to qualify.

Can I Avoid the Mortgage Stress Test?

You can potentially avoid the mortgage stress test by applying for a mortgage with provincially regulated credit unions or alternative lenders, as they are not under OSFI’s jurisdiction and are not required to apply the stress test.

How much do you need?

100% FREE

Who Does the Mortgage Stress Test Apply To?

The mortgage stress test applies to both insured and uninsured mortgages, with the new qualifying rate of 5.25% or your contract rate plus 2% (whichever is higher).

Why a Loan with us?

Exclusive Offers

FREE Service

Expert tips and Experience

Apply Once and Get Many Offers

Save Time and Money