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Insights & advice

What is the mortgage stress test?

Sept. 2021 – 15 min read

Key takeaways

  • All homebuyers are subject to the mortgage stress test

  • The mortgage stress test helps protect you from defaulting on your mortgage should interest rates rise and your mortgage payments increase significantly

  • There are strategies to improve your mortgage stress test scores

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What the mortgage stress test is

Simply put, the mortgage stress test determines if you’ll still be able to pay your mortgage should interest rates rise. 

It provides rules that mortgage providers use to calculate if you qualify for a mortgage and how much you can borrow. 

The mortgage stress test is used when you buy a home, switch to another mortgage provider, take out a homeowner line of credit or refinance your mortgage, but not when you renew your mortgage with the same provider. 

The test was introduced in 2018 by the federal government and was adapted to current housing market conditions on June 1, 2021.

Why it’s important

The mortgage stress test is important because it helps protect you from defaulting on your mortgage should interest rates rise and your mortgage payments increase significantly.

It was created to help ensure home buyers purchase a home they can afford and can manage the payments for, including balancing other debts and monthly expenses, even if interest rates change. 

What the test looks at

To determine if you’re able to afford a mortgage, the provider will look at:

  • The mortgage amount

  • Current interest rates

  • Mortgage amortization period

  • Your household income

  • Housing costs and/or monthly condo fees

  • Your current debt

How a mortgage provider determines what you can afford

The mortgage provider will make 2 calculations. 

The first is a gross debt service (GDS) ratio. This is the percentage of your pre-tax income you’ll use to pay for housing costs including mortgage, utilities and property taxes. It should be no more than 35%.

The second is a total debt service (TDS) ratio which includes all of your outstanding personal debt (mortgage, car loans, credit card, lines of credit, etc.) It should be no more than 42% of your pre-tax income.  

How to stress test your mortgage

Let’s say you wanted a mortgage for $400,000 and your mortgage provider was offering a rate of 1.78% with monthly payments of about $1,650. To stress test your mortgage you’d have to prove you could afford to pay the higher of:

  • The rate offered by your mortgage provider plus 2%
  • 5.25% 

Payments on a mortgage of $400,000 at 5.25% would be $2,385. 

If that $2,385 monthly payment fits into your GDS of 35% or less and your TDS of 42% or less, your mortgage would be stress tested.

The above example is for illustrative purposes only. Situations will vary according to specific circumstances.

What the test results show

A high GDS and TDS ratio (close to the maximum or over) may not disqualify you from getting approved for a mortgage, However, you may have to reconsider how much home you can afford. 

A low GDS and TDS ratio means you should qualify for your mortgage and could potentially afford a more expensive property and/or have cash flow to support your lifestyle.

Improving your stress test results

  • Save up to increase your down payment. This will lower your monthly mortgage payment and your GDS and TDS ratios.
  • Pay off as much other debt as you can before you apply for a mortgage.
  • Get someone to co-sign on your mortgage.

What’s next?

Now that you understand more about the mortgage stress test, you may wish to contact your financial advisor and a credit planning consultant to:

  • Confirm the size of mortgage you can afford

  • Look at ways to pay down debt or increase your down payment

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The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.