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Mortgage stress test: What you need to know

A mortgage stress test is an important step in the mortgage pre-approval process. Here we explain what a mortgage stress test is and help you understand the latest rules.

By ATB Financial 22 October 2021 4 min read

Buying a home is a major life decision. As you go through the pre-approval process to secure a mortgage, you may hear the term “mortgage stress test”. 

But don’t worry—a mortgage stress test doesn’t have anything to do with your blood pressure. It has to do with the health of your finances and how you’ll handle monthly home ownership expenses, and how you could handle possible fluctuations in interest rates over the life of your mortgage. 


What’s a mortgage stress test? How does it work?

If you’re looking to borrow money for a residential mortgage, your mortgage provider is required to perform a mortgage stress test before approving the loan.  

The mortgage provider will check that you, as a borrower, can make your mortgage payments, both today and in the future. The provider calculates ratios at a qualifying interest rate to determine how much you can borrow while being able to pay back your mortgage, even if economic conditions cause interest rates to increase. (Read on for more on these ratios.)

The outcome of the stress test determines the total amount you're qualified to borrow for a residential mortgage. 


Why was the mortgage stress test created? 

The mortgage stress test was created by the Government of Canada to make sure that prospective homeowners buy within their means. The stress test helps to protect you as a home buyer, particularly against interest rates going up in the future. The test also helps to protect you from the risks associated with taking on a mortgage that’s too big for you to manage. It also gives the mortgage provider, and you, confidence that you can balance your debt obligations and monthly expenses, even if conditions change. 

Do I have to take the mortgage stress test? 

The mortgage stress test isn’t an actual exam you take. The mortgage provider will ask some questions to get information about your income, monthly expenses and current debt load. They’ll use that information to conduct the test on your behalf. While it’s mandatory, you’re not technically “taking a test”.


What kinds of things does the mortgage provider look at in a mortgage stress test?

The mortgage provider will take several factors into account to determine your ability to afford a mortgage. These could include:

  • The mortgage amount
  • Current interest rates
  • Amortization period of the mortgage
  • Your household income
  • Housing costs and/or monthly condo fees
  • Your debt obligations

The mortgage provider will do several calculations to decide how much you can afford, and if you’ll still be able to pay down your mortgage at a higher interest rate. 


What are the calculations used in a mortgage stress test?

A mortgage stress test calculates two debt ratios. You must meet a minimum threshold in both to pass the stress test. 

The first is called a gross debt service ratio (GDS). This ratio measures your ability to afford your mortgage based on your income, while also being able to cover your housing costs. This includes your mortgage payment, as well as other monthly household expenses, such as any applicable condo fees, utility bills and property taxes. Your GDS ratio should not exceed 35%. 

The second is called the total debt service ratio (TDS). This ratio factors in all of your debts, and it measures your ability to afford your mortgage while being able to meet your projected housing costs as well as any existing debt obligations you have. The TDS threshold is set at 42%. 

Understanding Gross debt service ratio (GDS) vs. Total debt service ratio (TDS)

What is a 'qualifying rate'?

When applying for a mortgage, the payment amount will be calculated using a qualifying interest rate, rather than the actual rate on your mortgage. It’s set by the government of Canada and will be higher than the actual rate agreed to between you and your financial institution. It takes into account a possible future interest rate increase and how that would affect your ability to pay your mortgage and expenses. Chat with your financial institution to get the current rate.


What does the mortgage stress test show?

Calculating your GDS ratio and TDS ratio at a qualifying interest rate helps ensure you’ll still be able to pay for your home if interest rates increase. The results of the test might affect your ability to secure a mortgage, and how much you qualify for. 

My ratios are high. How does this affect my ability to purchase a home? 

High ratios don’t automatically disqualify you from securing a mortgage, but you may have to reconsider how much you can afford to spend on a home.

What can I do to perform well on my mortgage stress test?

There are a few factors that can help you perform well on your mortgage stress test:

  • Increase your down payment, which will lower your monthly mortgage payments, which will then help decrease your GDS and TDS ratios.
  • Pay off as much debt as you can before you apply for a mortgage (check out our best advice for paying off debt).
  • Consider waiting for your income to increase before you apply for a mortgage.

The mortgage stress test gives you (and the mortgage provider) the confidence to purchase the house of your dreams, while staying within your means. 


Want to learn more about the home buying journey? Download our free guide.

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