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When you apply for a mortgage in Canada, the lender doesn't check whether you can afford the payment at your actual interest rate. It checks whether you could afford it at a higher, "stressed" rate. This is the mortgage stress test, introduced by the banking regulator (OSFI) under Guideline B-20, and it's the reason many buyers qualify for less than they expect.
The qualifying rate
Every federally regulated lender must qualify you at the higher of two numbers:
- your contract rate plus 2%, or
- a floor of 5.25% (the minimum qualifying rate).
So if your actual mortgage rate is 4.8%, you're tested at 6.8% (4.8% + 2%). If your rate is 3.0%, you're tested at 5.25%, because the floor is higher than 3.0% + 2%. You still pay your contract rate — the stressed rate is only used to confirm you'd survive a rate increase.
The two debt ratios: GDS and TDS
Using that qualifying rate, lenders calculate two ratios against your gross (pre-tax) income:
Gross Debt Service (GDS) — the share of income that housing costs consume: mortgage payment (at the qualifying rate) + property tax + heating + half of any condo fees. Lenders generally want GDS at or below 39%.
Total Debt Service (TDS) — GDS plus all your other debt payments: car loans, student loans, credit card minimums, lines of credit. Lenders generally want TDS at or below 44%.
Whichever ratio binds first sets your maximum. Carrying a car payment or credit-card balance can lower your approval more than people expect, because it eats into the TDS limit directly.
A worked example
Suppose your household earns $120,000 gross ($10,000/month). The 39% GDS limit gives you about $3,900/month for all housing costs. Subtract, say, $400 for property tax and $150 for heating, and roughly $3,350/month is left for the mortgage payment — calculated at the qualifying rate, not your real rate.
At a 6.8% qualifying rate over 25 years, $3,350/month supports a mortgage of about $485,000. With a 20% down payment that's a home around $606,000 — even though your actual payment at, say, a 4.8% contract rate would be noticeably lower. The gap between "what I'll pay" and "what I'm tested at" is the whole point: it's a buffer against rising rates.
Who the stress test applies to
The stress test applies to all mortgages from federally regulated lenders — the big banks and most credit unions — whether your down payment is above or below 20%. It also applies when you renew with a different lender or refinance. Notably, if you renew with your existing lender at maturity, you generally don't have to requalify, which is one reason renewal shopping is more constrained than it looks.
How to qualify for more
- Pay down other debts first. Eliminating a $400 car payment can raise your maximum mortgage by tens of thousands, because it frees up TDS room.
- Increase your down payment. More down means a smaller mortgage for the same home, improving both ratios.
- Extend the amortization. A 30-year amortization lowers the monthly payment and improves GDS/TDS, though you pay more interest overall.
- Add a co-applicant's income (with their debts) if it improves the combined ratios.
Frequently asked questions
Do I actually pay the stress-test rate? No. You pay your contract rate. The qualifying rate is only used to confirm you could handle a higher one.
Does the stress test apply if I put 20% or more down? Yes. It applies to insured and uninsured mortgages from federally regulated lenders.
Can I avoid the stress test? Renewing with your existing lender at maturity generally doesn't require requalifying. Some provincially regulated credit unions have more flexibility, but most lenders apply it.