UNDERSTANDING THE MORTGAGE STRESS TEST

Canada’s mortgage stress test often gets blamed for slowing home purchases — but in reality, it’s designed to prevent buyers from taking on more mortgage than they can handle at renewal time or during interest-rate increases. The bigger issue? Consumer debt, car loans, and credit card balances have a much larger impact on what borrowers actually qualify for.

See how debt—not the stress test—is the real reason many buyers can’t qualify 👇

The stress test requires borrowers to qualify at the higher of:

✔️ the contract mortgage rate + 2%

OR

✔️ the Bank of Canada qualifying rate

This ensures borrowers can still afford payments if rates rise.

However — the stress test does **not** account for lifestyle or financial changes that occur *after* the mortgage is approved, such as childcare costs, new car payments, credit card debt, or financing new purchases. These real-world expenses are what reduce borrowing power the most.

1️⃣ Real Impact of the Stress Test

Yes, the test slightly reduces the maximum mortgage amount — but it is rarely the main reason for a decline.

Much bigger culprits include:

• vehicle loans

• credit card balances

• lines of credit

• personal loans

These debts directly increase your Total Debt Service Ratio (TDS), limiting how much of a mortgage you can qualify for.

2️⃣ Scenario Example #1 — $80,000 Household Income

Income: $80,000

Down payment: $17,000

Debts:

• student loan: $200/month

• vehicle loan: $300 biweekly

Approval amount: approx. $250,000 home

➡️ BUT adding only **$300/month** in new debt (credit card or loan) would completely eliminate mortgage approval.

3️⃣ Scenario Example #2 — $125,000 Household Income

Income: $125,000

Down payment: $33,000

Debts:

• student loan: $200/month

• vehicle loan: $300 biweekly

Approval amount: approx. $500,000 home

➡️ Adding just **$500/month** in new debt would block approval entirely.

4️⃣ Why This Happens

The stress test assumes interest rates may rise.

But lenders look at your **actual monthly debt payments** today, such as:

• “don’t pay for 12 months” furniture financing

• newly financed vehicles

• large credit card balances

• new lines of credit

Even if payments haven’t started yet, lenders must count them — and that pushes your ratios too high.

5️⃣ Be Strategic With Debt Before Buying

Consumer debt is extremely easy to obtain in Canada — but it can destroy your mortgage eligibility.

Best practices:

✔️ avoid new loans 6–12 months before buying

✔️ keep credit cards below 30% utilization

✔️ avoid financing big-ticket items

✔️ pay down revolving credit where possible

A small change in debt can dramatically increase or decrease your approval amount.

💬 Final Thought

The stress test is often blamed, but the real approval killer is monthly debt. Even $300–$500 in extra payments can reduce your mortgage limit by hundreds of thousands of dollars. If you're planning to buy a home, speak with us first — we’ll review your debt, run accurate calculations, and map out a strategy to maximize your approval.

Send The Frontline Mortgage Group your numbers anytime if you'd like a personalized breakdown.