The mortgage stress test on a new loan
Federally regulated lenders qualify a new mortgage at a rate higher than the one in the contract. The qualifying rate is the greater of the contract rate plus 2 percentage points, or 5.25%. The 5.25% floor has been the benchmark since June 2021. At the rates in this month's thread, contract plus 2 is the number that binds, because those rates sit well above 3.25%.
A worked file at 4.43%
| $400,000 | $500,000 | |
|---|---|---|
| Payment you make at 4.43%, 25 years | $2,198.35 | $2,747.94 |
| Payment used to qualify, at 6.43% | $2,662.34 | $3,327.92 |
| Gap | $463.99 | $579.98 |
Gross debt service is the housing costs divided by gross income. The ceiling most insured and bank files are built to is 39%, and total debt service, which adds other debts, is 44%. Housing costs include the qualifying mortgage payment, property tax, heat, and half of condo fees. The mortgage payment alone is not the whole ratio.
If property tax is $300 a month and heat is $150, a $400,000 loan at a 6.43% qualifying payment has housing costs of $3,112.34 before condo fees. Divided by 0.39, that needs about $7,980 of gross income a month, or about $95,800 a year. Change the tax or the heat and the income moves with them. This is an illustration, not a pre-approval.
When the test shows up, and when it does not
| Situation | Qualifying rate |
|---|---|
| New purchase or refinance at a bank | Greater of contract plus 2 points, or 5.25% |
| Renewal at the same federally regulated lender, same balance | Generally not retested. Some lenders run a test anyway |
| Uninsured straight switch at renewal, balance and amortization unchanged | The minimum qualifying rate has not been required since November 21, 2024. The new lender still assesses the file |
| Credit union | Not under the federal guideline. Many still use a similar test |
That switch rule is why a harsh renewal letter is not a trap by regulation. You can move an uninsured mortgage sideways without clearing contract-plus-two, if you do not borrow more and you do not stretch the amortization. Borrow more, and the test is back.
A broker pricing the file needs income, other debts, and the tax bill, not only the rate you hope for. The $400,000 income note walks one example. To have someone run your numbers, request cheaper rates.