Mortgage Stress Test Changes in 2025: What They Mean for Your Borrowing Power
Canada’s housing market has experienced dramatic swings in recent years. Record-low interest rates during the pandemic fueled borrowing and drove home prices higher, but steep rate hikes by the Bank of Canada since 2022 have squeezed affordability. To protect borrowers and lenders, Canadian regulators introduced the mortgage stress test in 2016, forcing banks to qualify borrowers at a higher rate than they will actually pay. This ensures mortgages remain manageable even if circumstances change.
In 2025, the stress test framework is evolving again. This blog explores what the stress test is, why it exists, the latest changes from the Office of the Superintendent of Financial Institutions (OSFI), and how those changes affect borrowing power for new buyers and current homeowners. We also provide practical tips to help you navigate the rules and maximize your mortgage.
At Rowe Mortgage Solutions, we guide buyers through these changes and help make homeownership more attainable.
Why Canada Uses a Mortgage Stress Test
The mortgage stress test acts as a regulatory safety check. When you apply for a mortgage, lenders compare your debt service ratios against a qualifying rate higher than your contract rate. Under OSFI’s Guideline B-20, federally regulated lenders (banks, trust companies, and federal credit unions) must use the higher of:
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Your contract rate plus 2 percentage points, or
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OSFI’s minimum qualifying rate (currently 5.25%).
For example, if your offered fixed rate is 4.04%, you are stress tested at 6.04%. The test applies to insured mortgages (down payment <20%) and uninsured mortgages (down payment ≥20%).
The stress test ensures borrowers can handle higher rates or income shocks. Canada’s high household debt makes even moderate rate increases a potential strain. Stress-test rules only apply to federally regulated lenders; some provincial credit unions and alternative lenders follow their own criteria.
How the Stress Test Works in Practice
Borrowers must meet Gross Debt Service (GDS) and Total Debt Service (TDS) ratios—typically below 39% and 44%, respectively—calculated at the qualifying rate. Because this rate is higher than the contract rate, it reduces the maximum mortgage you can qualify for.
For example, a borrower with $100,000 income and a $25,000 down payment may qualify for a $467,000 home at a 3.95% rate, but only $433,000 when stress tested at 5.95%. This $34,000 difference may require scaling back expectations, increasing the down payment, or finding a co-signer.
The stress test applies to home purchases, refinances, and new HELOCs. However, as of November 21, 2024, OSFI removed the need to apply the minimum qualifying rate when borrowers switch lenders at renewal, provided the loan amount and amortization do not change. This reduces the barrier for homeowners shopping around.
What’s Changing in 2025: OSFI’s New Policies
OSFI regularly updates mortgage guidelines to manage systemic risk. Two major changes in 2025 are:
1. Removal of Minimum Qualifying Rate for Straight Switches
Federally regulated lenders no longer need to apply the minimum qualifying rate for uninsured borrowers switching lenders at renewal without increasing the loan amount or extending amortization. Lenders still apply prudent underwriting, but can choose an appropriate qualifying rate. This encourages competition and gives homeowners more flexibility. Straight switches of insured mortgages at renewal are already not subject to the stress test.
2. Introduction of Loan-to-Income (LTI) Limits
OSFI now imposes institution-specific limits on new uninsured mortgages with a loan-to-income ratio above 4.5. This portfolio-level cap prevents excessive household leverage, ensuring lenders maintain a balanced mix of borrowers. The limit does not apply to insured mortgages and does not impact renewals.
These changes indicate a move away from a strict “one-size-fits-all” stress-test rate toward a more nuanced approach that monitors leverage directly. During this evaluation period, the traditional stress-test rate and new LTI limits coexist.
How LTI Limits Affect Borrowing
High loan-to-income ratios can be risky if interest rates rise or income drops. By capping the proportion of high-LTI loans, OSFI reduces systemic risk while allowing some flexibility.
Implications for Borrowers:
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New homebuyers: May see slightly reduced borrowing power if loan amounts exceed 4.5× income, particularly in high-priced markets.
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Current homeowners refinancing: Higher qualifying rates still apply when increasing mortgages or changing amortization, potentially limiting how much equity can be accessed.
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Renewals: Straight switches benefit from the MQR removal, making it easier to shop around for better rates.
Overall, the changes protect borrowers while maintaining access to credit.
Practical Tips to Navigate the 2025 Stress Test
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Reduce Existing Debt and Improve Credit
Lower balances on credit cards or personal loans to reduce GDS and TDS ratios. Keep credit utilization below 30% and check your credit report for errors. -
Increase Your Down Payment
A larger down payment reduces your mortgage amount, improves debt ratios, and lowers your LTI multiple. Consider using an FHSA or the RRSP Home Buyers’ Plan. -
Consider Longer Amortization
Stretching your mortgage to 30 years lowers monthly payments, improving ratios. Be mindful that total interest paid will be higher. -
Work with a Mortgage Broker
Brokers like Rowe Mortgage Solutions can help you find lenders with flexible underwriting criteria, compare options, and pre-qualify you before house hunting. -
Adjust Expectations
In a high-rate environment with LTI constraints, consider more affordable neighborhoods, smaller units, or co-ownership options to meet stress-test requirements.
Refinancing, Alternative Lenders, and Exemptions
Some provincially regulated credit unions and private lenders are not bound by OSFI’s stress test and may offer alternative qualifying criteria. While this can help borrowers who don’t pass traditional stress tests, these lenders often have higher interest rates, additional fees, or require more equity.
Refinancing, including HELOCs or second mortgages, triggers the stress test at the qualifying rate and counts toward LTI limits, so careful planning is necessary.
Looking Ahead: The Future of the Stress Test
OSFI’s new LTI framework and removal of the MQR for straight switches suggest regulators are exploring more dynamic, risk-based approaches. These policies will be monitored through 2025, with potential revisions to stress-test methodology after January 2026. Borrowers should stay informed and work with professionals to optimize their mortgage strategy.
Canada’s mortgage stress test has helped maintain financial stability by ensuring borrowers can withstand higher rates and economic shocks. In 2025, OSFI’s removal of the minimum qualifying rate for straight renewals and the introduction of loan-to-income caps are significant reforms. These changes balance borrower flexibility with risk management, particularly for first-time buyers and those renewing mortgages.
By understanding the stress test, reducing debt, saving for a larger down payment, and working with experts like Rowe Mortgage Solutions, Canadians can navigate these changes and achieve their homeownership goals, even in a dynamic housing market.
Contact Cody today or email codyrowe@dominionlending.ca for personalized guidance.
