The Mortgage Stress Test in Canada: How It Affects BC Buyers

Many British Columbia buyers are surprised to learn that they are not approved based on the payments they will actually make. Lenders also check whether you could carry the mortgage if rates were higher. That check is commonly called the stress test.

This article explains the idea in plain words, how it fits with down payment and insurance rules, and what to ask your lender at renewal or if you want to switch. The qualifying rate itself is set by regulators and can change, so confirm the current figure with a lender or mortgage professional.

This article covers the law of British Columbia.

What the stress test is

The stress test is a qualifying rule. Instead of testing your budget only at your contract rate, the lender tests it at a higher qualifying rate. If you can still handle the payments at that rate, you pass.

The point is protection. It gives you a cushion if your rate rises at renewal or if your income or expenses change. The practical effect is that you may qualify for a smaller mortgage than you expected.

How it limits what you can borrow

Lenders review your assets, income and debt to estimate the most they might lend and at what rate. The test is part of that estimate, so a higher qualifying rate generally means a lower maximum loan.

Several things work together to set your real buying power:

• Income and debts: more existing debt leaves less room in the test.
• Down payment: the minimum is 5% of the price if the price is $500,000 or less, and a larger share applies to the part above that.
• Price band: at $1.5 million or more the minimum down payment is 20% of the whole price.
• Amortization: insured purchase loans have a maximum of 25 years, with 30 years available in some cases.

Since December 15, 2024, 30-year amortizations are available to all first-time home buyers and all buyers of new builds. A longer amortization lowers the payment, which can help with qualifying.

Pre-approval is not a promise

Pre-approval does not guarantee approval. The rate can be locked for 60 to 130 days depending on the lender. The pre-approved amount is a ceiling, and the final amount depends on the property value and your down payment. The property must also meet the lender's standards, and the lender can still refuse.

Ask how long the pre-approved rate is guaranteed, whether you automatically get a lower rate if rates fall, and whether the pre-approval can be extended. Lenders usually ask for ID, proof of employment, and proof of your down payment and closing costs, and self-employed borrowers typically provide two years of CRA notices of assessment.

Insurance and the stress test

Mortgage loan insurance is typically needed if your down payment is less than 20% of the purchase price. A lender may require it even with 20% down, usually if you are self-employed or have a poor credit history. The lender pays the premium but likely passes the cost to you, and you can pay a lump sum or add it to the mortgage.

Insurance is not available on homes priced at $1.5 million or more, so those buyers need 20% down and an uninsured mortgage. If your home is near that line, check the details with your lender, because some published pages still show older wording.

Renewal, switching and what to ask next

Whether the test applies when you renew with the same lender or move to a new one depends on the lender, the type of lender and the kind of mortgage. Do not assume either way. Switching to a different lender often means a new qualification, and breaking your mortgage early can carry a prepayment charge, usually the higher of three months' interest on the remaining balance or the interest rate differential.

• Ask your lender what qualifying rate it will use today and whether it applies at renewal.
• Ask whether a switch to another lender requires you to qualify again.
• Ask for a written prepayment charge if you are thinking of leaving before the term ends.
• Get a pre-approval and ask about its length and extension.
• Keep your debts low and your documents organized before you apply.

If you struggle with payments, contact your lender as soon as possible, because relief options exist. A lawyer, accountant or mortgage professional can help you work out how the test applies to you.

Frequently asked questions