If you are getting a mortgage in Canada, you will hear about the “stress test” early on. It can have a big impact on how much home you can buy, so it is worth understanding before you start your search.
What is the stress test?
The stress test is a federal rule that checks whether you could still afford your mortgage payments if interest rates went up. Instead of qualifying you at the rate you actually get, the lender qualifies you at a higher “qualifying rate.”
How the qualifying rate is calculated
You must qualify at the higher of:
- 5.25%, or
- your contract mortgage rate plus 2 percentage points.
For example, if your lender offers you 4.0%, you will be tested at 6.0%. Your actual payments are still based on 4.0%; the higher rate is only used to approve the loan.
Debt service ratios
Lenders look at two ratios using that qualifying rate:
- Gross Debt Service (GDS): housing costs (mortgage payment, property taxes, heating and half of any condo fees) as a share of your gross income.
- Total Debt Service (TDS): housing costs plus all other debts such as car loans, lines of credit and credit card payments.
For insured mortgages, the typical limits are around 39% GDS and 44% TDS. Every lender has its own policies, so a good mortgage professional is worth their weight in gold.
Good news for renewals
If you are renewing and want to switch to a different lender, you no longer have to re-qualify under the stress test, as long as you are not increasing your loan amount or extending your amortization. This makes it easier to shop around for a better rate at renewal.
How to improve your buying power
- Pay down consumer debt before you apply. Lowering a car payment can raise your approval more than you might expect.
- Consider a longer amortization. First-time buyers and buyers of new builds can access 30-year amortizations on insured mortgages.
- Add a co-borrower if it makes sense for your situation.
- Avoid new credit applications in the months before buying.
- Get pre-approved early so there are no surprises when you find the right home.
The bottom line
The stress test is designed to protect you, but it does reduce how much you can borrow. Knowing your real numbers up front helps you shop with confidence. The Apollo Realty Advisors team works with trusted mortgage professionals across Calgary. Reach out and we will connect you.
