Mortgage Stress Test Canada: How It Cuts Your Buying Power

If you’re shopping for a mortgage right now, there’s something you need to know: the mortgage stress test might be quietly cutting your buying power by thousands of dollars. And most people have no idea it’s happening.

Let me break this down in plain English so you can protect yourself.

What Is the Mortgage Stress Test?

The stress test is a government rule that all lenders must follow. Here’s how it works:

When you apply for a mortgage, your lender gives you a certain Interest Rate. Let’s say it’s 3%. Your monthly payments are based on that 3% rate. But here’s the catch: you don’t qualify based on that rate.

Instead, you have to prove you can afford payments at a much higher rate. Right now, that rate is 5.25%.

The government says this protects you. If rates go up when your mortgage renews, they want to make sure you can still afford your payments. Sounds good in theory, right?

But here’s the problem: it means you can borrow way less money than you actually need.

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The Critical Number You Need to Know

There’s one number that changes everything: 3.25%.

Here’s why it matters. The stress test works like this: lenders must qualify you using whichever number is higher:

Your actual rate plus 2%
The benchmark rate of 5.25%

If your mortgage rate is 3.25% or higher, your buying power takes a hit. That’s because 3.25% plus 2% equals 5.25%. Anything above 3.25% means you’re qualifying at an even higher rate.

Let’s say your rate is 3.5%. Add 2% and you’re qualifying at 5.5%. That’s way higher than your actual rate, and it means you can borrow significantly less.

Why Your Lender Choice Matters More Than Ever

This is where most people miss out. If you’re shopping around and one lender offers you 3.5% while another offers 2.8%, the difference isn’t just about monthly payments. The lower rate actually lets you qualify for MORE money.

Don’t just stick with your bank because it’s convenient. Shop around. Find a lender with rates below that 3.25% threshold if possible.

Fixed vs Variable Rates Right Now

Variable rates are sitting as low as 1.5% with some lenders. Fixed rates? They’re typically between 3.25% and 3.64%, with some banks even higher.

Yes, variable rates will probably go up. But even if they increase by 1.25%, they’d only hit 2.75%. That’s still cheaper than most fixed rates today.

Plus, here’s the real advantage: qualifying at a lower variable rate means you can borrow more money.

A Strategy to Maximize Your Buying Power

Now, I’m going to share something that works well for certain buyers. But pay attention to the warnings, because this isn’t right for everyone.

Here’s the strategy:

Get approved for a variable rate mortgage (which is lower)
This lets you qualify for more money
Buy your property and close the deal
After closing, convert to a fixed rate with your lender

Most lenders let you switch from variable to fixed with no penalty. It’s in their terms and conditions. You’ve already qualified for the higher amount, and now you get the rate security you wanted.

Important Warnings About This Approach

Before you try this, understand the risks:

Make sure your lender actually allows no-penalty conversions
If you’re borrowing at your absolute maximum, you’re taking on extra risk
If rates go up before you convert, your payments go up too
The stress test exists to protect you, so think carefully before pushing against it
Only use this if you actually need the extra buying power

This works great in bidding wars or when you need just a bit more to win a property. But if you don’t need it, don’t do it.

The Pre-Approval Trap Nobody Talks About

Here’s something that catches people off guard: your pre-approval amount changes depending on whether you choose fixed or variable.

You need TWO numbers:

What you’re approved for with a variable rate
What you’re approved for with a fixed rate

If you got pre-approved months ago and haven’t checked in since, your approved amount might have shrunk. Rates have been climbing. Your rate hold expires after 90-120 days depending on the lender.

Here’s the scary part: if you think you’re approved for $500,000 but rates have changed, you might only qualify for $470,000 now. If you’ve already made an offer without conditions (which is super common right now), you could be in serious trouble.

Why Spring and Summer Matter

Lenders typically roll out their best promotions in spring and summer. These are the lowest rates you’ll see all year.

Even if the Bank of Canada keeps raising rates, lender promotions can offset some of those increases during these seasons.

By fall, those promotions disappear. You’re stuck with higher base rates and no promotional discounts. That’s a double hit to your buying power.

Will the Market Crash?

People keep waiting for prices to drop. Here’s the reality: there aren’t enough homes for the number of people who want to buy them.

When rates go up, the market might slow down for a few weeks. Buyers pause and adjust. But then everything returns to normal because the supply problem hasn’t changed.

If you’re serious about buying, waiting for a crash that probably won’t happen means you’re missing out on current opportunities.

What You Should Do Right Now

Here’s your action plan:

If you’re starting your search:

Get pre-approved now to lock in spring rates
Get both your variable AND fixed approval amounts
Find a lender who does full underwriting, not just rate holds
Ask about no-penalty variable-to-fixed conversions

If you already have a pre-approval:

Check your expiration date immediately
If it’s expired or close, get re-approved
Find out if your buying power has shrunk
If it has, shop around for better rates

If you’re making offers:

Only skip conditions if you have a rock-solid, fully underwritten approval
Make sure your approval is current, not months old
Understand exactly how much you’re approved for at today’s rates

The Bottom Line

The stress test is eating away at buying power, especially if your rate is above 3.25%. But you’re not powerless here.

Shop around for lenders with lower rates. Understand the difference between variable and fixed approval amounts. Get pre-approved before the spring promotions disappear. And if you need to maximize your buying power, consider the variable-to-fixed strategy, but only if you understand the risks.

Don’t just accept the first rate your bank offers. Don’t assume your old pre-approval is still good. And definitely don’t make offers without knowing exactly where you stand with current rates.

The market is competitive, but being informed gives you a real advantage. Use it.

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Frequently Asked Questions

What is the mortgage stress test in Canada?

The mortgage stress test is a government rule that requires you to qualify for a mortgage at a higher interest rate than you'll actually pay. Even if your rate is 3%, you must prove you can afford payments at 5.25% or your rate plus 2%, whichever is higher. This reduces how much you can borrow.

Why does the 3.25% rate matter for mortgages?

If your mortgage rate is 3.25% or higher, the stress test significantly reduces your buying power. That's because 3.25% plus 2% equals 5.25% (the benchmark stress test rate). Any rate above 3.25% means you qualify at an even higher stress test rate, which limits how much you can borrow.

Should I choose a fixed or variable mortgage rate right now?

Variable rates are currently much lower (around 1.5%) compared to fixed rates (3.25%-3.64%). Even if variable rates increase by 1.25%, they'd still be lower than most current fixed rates. Plus, qualifying at a lower variable rate means you can borrow more money. However, your choice depends on your risk tolerance and financial situation.

Can I switch from a variable to fixed rate mortgage after closing?

Most lenders allow you to convert from variable to fixed rate with no penalty after you've closed on your property. This is often included in standard terms and conditions. However, you must verify this with your specific lender before using this strategy, as policies can vary.

How long does a mortgage pre-approval last?

Most mortgage pre-approvals and rate holds last between 90-120 days, depending on the lender. After this period expires, you'll need to get re-approved at current rates, which could be higher. This means your approved amount might be lower than your original pre-approval.

What happens if my rate hold expires before I buy?

If your rate hold expires, you'll need a new pre-approval at current rates. If rates have increased during your search, your buying power will have shrunk. For example, you might have been approved for $500,000 but now only qualify for $470,000. Always check with your lender before making offers.

Should I make an offer without a financing condition?

Only make offers without conditions if you have a fully underwritten, current pre-approval (not just a rate hold). In competitive markets, no-condition offers are common, but they're legally binding. If you can't actually get financing, you could face serious legal and financial consequences.

When is the best time to get a mortgage pre-approval?

Spring and summer are typically the best times because lenders release their lowest rates and best promotions during these seasons. Even if the Bank of Canada raises rates, lender promotions can offset some increases. By fall, these promotions usually disappear, leaving you with higher base rates.

Disclaimer: LendCity Mortgages is a licensed mortgage brokerage, and our team includes experienced real estate investors. While we are qualified to provide mortgage-related guidance, the broader financial, tax, and legal information in this article is provided for educational purposes only and does not constitute financial planning, tax, or legal advice. For matters outside mortgage financing, we recommend consulting a Chartered Professional Accountant (CPA), licensed financial planner, or qualified legal advisor.

Written by

LendCity

Published

December 22, 2025