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Mortgage stress test in Canada

By Patrick Ross · Reviewed By Jacob Norris · Last Updated July 17, 2024

If you want to purchase a home in Canada you will need to pass the mortgage stress test — whether you're a first-time buyer or seasoned homeowner it is essential to know how the stress test impacts your borrowing.

What is the mortgage stress test?

The mortgage stress test is a calculation used to ensures that those purchasing a home in Canada will be able to afford their mortgage payments if interest rates rise. Since mortgage terms in Canada are 5-years there is a chance that the interest rate you originally signed for will be higher when you go to renew your mortgage. While you may be able to afford the mortgage amount you seek at current rates, it is the qualifying rate used in the stress test which limits your total affordability. It does this by simulating your mortgage payments at a higher mortgage rate.

In addition to applying for a mortgage you will also need to pass the mortgage stress test if you are taking a home equity line of credit, switching to a new lender upon renewal or refinancing your mortgage.

How the mortgage stress test is calculated

The mortgage stress test uses the qualifying rate to determine how much mortgage you can afford. The qualifying rate is the higher of the following:

  • 5.25%; or
  • contract rate + 2.00%

The qualifying rate is then used to determine your gross debt service (GDS) ratio and total debt service (TDS) ratio. If these debt service ratios indicate that you are still able to afford your mortgage using the qualifying rate then you will have passed the mortgage stress test.

Learn More: Debt Service Ratios

Who is exempt from the mortgage stress test?

While the stress test is required at many Canadian financial institutions there are still a few ways to avoid the stress test.

If you are renewing your mortgage with the same lender you are exempt from the mortgage stress test. If you are applying for a mortgage you may also be exempt if you are receiving your mortage from a credit union, B-lender or private lender. The stress test is mandatory for federally regulated lenders in Canada.