Whether you bought your first home years ago or are thinking of doing so in the next few years, you’ll want to get to know the Canadian mortgage stress test.  

The relatively new test came into effect in 2018 when the Office of the Superintendent of Financial Institutions (OFSI) – a federal bank regulator, implemented a mortgage stress-test for all new borrowers in an effort to protect Canadian homeowners by ensuring they spend within their means.

To qualify for a mortgage from a bank, you’ll need to pass the stress test. To do this, homebuyers need to prove that they can afford a mortgage at a qualifying rate. For homebuyers who have a down payment of 20% or more, this rate is determined using the Bank of Canada's minimum qualifying rate and the interest rate offered by the lender plus 2%, whichever is higher. For homebuyers who have a down payment of less than 20%, this rate is the higher of the Bank of Canada minimum qualifying rate and the interest rate offered by the lender.

Why the mortgage stress-test was implemented

The test came about over concerns that the mortgage industry was growing too large and too quickly in Canada, which could be a risk to the country’s overall economic stability. 

The stress-test helps to determine if borrowers will be able to afford their mortgages even if rates rise.

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How to figure out the maximum amount you can borrow

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 are taking on in comparison to your income, while the TDS measures how much housing debt you would 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 the mortgage payment (at the stress-tested rate), property tax, heat, half of condo maintenance fees. For the TDS. all your debt repayments such as mortgages (at the stress-tested rate), credit card, car loans and student loans should be less than 44% of your household's gross annual income. These ratios may vary based on lender and/or default insurer.

This means when you factor in the stress-test into the equation, your income must stretch farther. The stress test will reduce the amount of mortgage loan you qualify for, which means you will have less money upfront to purchase a home.

What the mortgage stress test means for home buyers

Critics of the mortgage stress test point out that it affects mostly first-time home buyers and leaves young people out of the real estate market. First-time home buyers usually have much smaller down payments as they haven't yet built up equity in a previous house. They only have what they have saved or what their parents have given them. The smaller the down payment, the bigger the mortgage they will need and the more they need to qualify for. First-time home buyers also may not have a relationship with a bank the way that resale buyers do. The stress test can make this process more challenging for this group. 

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

Ready to talk about how to choose the right mortgage for you? Book an appointment with a home financing advisor