How the stress test works
Whatever rate the lender offers you (the 'contract rate'), the lender qualifies your application at a higher rate (the 'qualifying rate'). The qualifying rate is the higher of: your contract rate plus 2%, or 5.25% (the federal benchmark).
If your contract rate is 4.39%, your qualifying rate is 6.39%. If your contract rate is 2.99%, your qualifying rate is 5.25% (the floor). If your contract rate is 5.99%, your qualifying rate is 7.99%.
The qualifying rate is only used for the affordability calculation. Your actual payment is still based on the contract rate. So while the test caps how much you can borrow, it doesn't make your payment higher than what you agreed to.
Why the policy exists
The 2018 stress test was a response to debt levels and housing prices that had grown faster than incomes for over a decade. Regulators worried that if rates rose, marginal borrowers would face payment shock at renewal and risk default.
The test creates a buffer: you must afford 2% of headroom. If rates do rise, you should still be able to make payments. If they don't, you have extra room — fine.
Critics argue the policy is too restrictive, especially for first-time buyers, and that it's contributed to keeping rents high (more renters who can't quite buy). Supporters point to default rates remaining low through the 2022-2023 rate spike as evidence the policy worked.
Workarounds and alternatives
Provincially-regulated lenders (mostly credit unions) are not required to apply the federal stress test. Some apply their own less-strict version. Others apply nothing.
This means borrowers who don't quite pass the federal stress test can sometimes qualify at a credit union or alternative lender. The trade-off: rates are usually slightly higher (0.10-0.30%).
Adding a co-applicant (spouse, parent, sibling) is the other common workaround. Combined incomes make the stress-test calculation easier to pass.