How the Mortgage Stress Test Works (2025 Update for Ontario Homebuyers)

The Stress Test: What It Is and Why It Exists

If you’ve applied for a mortgage in Canada since 2018, you’ve likely heard of the mortgage stress test. It’s one of the most misunderstood parts of the home-buying process — and one of the most important.

Simply put, the stress test is a financial “pressure test.” It ensures that you can afford your mortgage even if interest rates go up or your income changes. It’s a safety net for both you and your lender.

But in 2025, with higher interest rates and new qualification rules, understanding how the stress test works — and how to plan for it — can make or break your approval.

Let’s break it down in plain English.

1. How the Mortgage Stress Test Is Calculated

Every lender in Canada must test your ability to afford a higher monthly payment than the one you’ll actually pay.

You’re qualified based on the higher of:

1. The Bank of Canada’s minimum qualifying rate (currently 5.25%), or

2. Your contract rate + 2%

That means if you’re approved for a 5.00% mortgage, the bank will calculate your debt ratios as if your rate were 7.00%.

It doesn’t mean you’ll pay that rate — it’s just used for qualification.

2. Why the Stress Test Exists

The rule came into effect to protect Canadians (and the economy) from sudden interest rate jumps.

When rates were ultra-low, many households took on large mortgages. The stress test was designed to ensure buyers could still afford their homes if rates rose — and as we saw in 2023–2024, that scenario isn’t hypothetical anymore.

In short: it’s there to avoid financial shock — for both borrowers and lenders.

3. How Lenders Use the Stress Test

Lenders use two key affordability ratios during qualification:

Ratio	Measures	Typical Limit
GDS (Gross Debt Service)	% of your income going to housing costs (mortgage, taxes, heat, 50% condo fees)	Max 39%
TDS (Total Debt Service)	% of your income going to all debts (housing + loans + credit cards + car payments)	Max 44%

The higher your income (or the lower your debt), the easier it is to fit under those limits.

👉 Example:If your household income is $8,000/month, your total housing costs must stay under $3,120 (GDS limit).That’s calculated at the stress test rate, not your actual rate — which is why qualification feels harder than it should.

4. Who Has to Pass the Stress Test

All borrowers must pass the stress test — whether you’re buying, refinancing, or renewing — but the rules differ slightly:

Situation	Stress Test Applies?	Notes
Buying a home	✅ Yes	Based on contract rate + 2% or 5.25%
Refinancing	✅ Yes	Even existing homeowners must requalify
Switching lenders	✅ Yes	If you move to a new lender
Renewing with the same lender	❌ No	You can renew without requalifying

5. How the Stress Test Impacts How Much You Can Borrow

Here’s the math behind the frustration.

Let’s say:

• You earn $120,000/year

• You have $500/month in car and credit payments

• You’re applying for a mortgage at 5.00%

If the lender tested you at your actual rate (5.00%), you might qualify for a $700,000 home.But under the stress test (7.00%), you may only qualify for around $575,000.

That’s the reality: the stress test can reduce your approved purchase price by 15–25%, depending on your situation.

6. What Changed in 2025

There haven’t been drastic changes to how the test itself is applied — but new amortization and lending rules introduced in 2024–2025 affect how it feels for borrowers.

Key updates:

• First-time buyers can now qualify for 30-year amortizations (instead of 25), which lowers their monthly payment and helps pass the stress test.

• B-lenders continue to offer slightly higher tolerance (up to ~48–50% debt service ratios) for borrowers with strong income but nontraditional situations.

• High-rate environment: With rates already high, the gap between the actual rate and the stress test rate has narrowed — meaning the impact is smaller than it was in 2022–2023.

7. Smart Ways to Pass the Stress Test

If you’re hitting a wall with the stress test, there are ways to improve your odds — legally and strategically.

✅ Pay off small debts.Eliminating a $200/month payment can boost your borrowing power by up to $40,000–$60,000.

✅ Increase your down payment.A higher down payment = smaller loan = lower debt ratio.

✅ Add a co-borrower.A parent, partner, or spouse with income can strengthen your file.

✅ Explore a 30-year amortization (if eligible).It reduces your payment and can make a big difference on paper.

✅ Work with a mortgage broker.Every lender calculates risk slightly differently — brokers know which ones will see your file in the best light.

8. The Bottom Line

The stress test might seem like an obstacle, but it’s really a filter for long-term financial stability.When you plan ahead — by managing debt, structuring your application right, and knowing your numbers — you’ll pass with confidence.

Remember: it’s not about “how much you can borrow.” It’s about what you can comfortably sustain.

CTA:Want to know how the stress test affects your approval — and what you can do to pass it easily?Let’s run the numbers together.👉 Book your personalized strategy session at LaframboiseMortgage.ca.