Short answer: you don't qualify at the rate you'll actually pay. Federally regulated lenders must qualify you at whichever is higher: your contract rate plus 2%, or a benchmark "qualifying rate" set by OSFI (currently 5.25%). This is the mortgage stress test, and it's the single biggest reason your maximum approval is lower than a simple payment calculation would suggest.
Why the Stress Test Exists
Regulators introduced the stress test to make sure borrowers can absorb a rate increase without immediately being unable to make their payment. If your contract rate is 4.5%, you're qualified as though you were paying 6.5%, so that if rates rise or your situation changes, there's a built-in cushion rather than a household stretched to its absolute limit from day one.
Who It Applies To
- All federally regulated lenders, banks and most mortgage lenders, must apply it, on both insured (less than 20% down) and uninsured (20%+ down) mortgages.
- Credit unions are provincially regulated and aren't legally required to apply the same test, though many use similar internal guidelines anyway.
- Private and alternative lenders generally don't apply the federal stress test, which is one reason they can approve borrowers a bank can't, at a higher rate to offset the added risk.
How Much It Actually Reduces Your Approval
Qualifying at roughly 2 percentage points above your actual rate typically reduces your maximum mortgage size by somewhere around 15-20% compared to what you'd qualify for at your contract rate alone. On a household that could technically afford an $800,000 mortgage at their real rate, the stress test might bring their approved amount closer to $650,000-$680,000, which is exactly why so many buyers are surprised by their pre-approval number.
Renewing vs. Switching Lenders
If you renew your mortgage with your existing lender at the end of your term, you generally don't have to requalify or pass the stress test again on the balance you already owe. If you switch to a different lender at renewal, though, you typically do need to requalify, stress test included, which is worth knowing before assuming a better rate elsewhere is automatically available.
Want to Know Your Real Number?
A pre-approval that actually accounts for the stress test saves you from falling in love with a home you won't be approved for. Get pre-approved properly before you start looking.