Mortgage Stress Test Changes: What First-Time Buyers Should Understand

For many first-time buyers, the biggest barrier to buying a home has not been the monthly payment. It has been qualifying under the mortgage stress test.

That framework may now be shifting.

Regulators are moving toward a different way of managing risk in the mortgage system, and if implemented, it could meaningfully change how some buyers qualify, particularly first-time buyers with stable income and limited down payments.

This article outlines how the stress test worked, what is changing, and who is most affected.

What the mortgage stress test did

The mortgage stress test was designed to ensure borrowers could still afford their payments if interest rates rose.

Instead of qualifying at the actual mortgage rate, buyers had to qualify at a higher benchmark.

That benchmark was:
• The contract rate plus 2%
• Or a minimum qualifying rate of 5.25%, whichever was higher

Even when real mortgage rates were closer to 5%, approvals were often calculated closer to 7%. For many buyers, that reduced purchasing power by roughly 20%.

Why first-time buyers felt it most

First-time buyers were often the most constrained by this structure.

Common characteristics included:
• Stable employment and income
• Limited down payment
• Strong ability to manage the real monthly payment

Many buyers were not far off qualifying. They were simply capped by how the stress test was calculated.

How buyers adapted

Over time, the stress test shaped buyer behaviour.

Common responses included:
• Choosing variable rate mortgages to stretch approval amounts
• Using credit unions or alternative lenders
• Accepting shorter terms or higher costs to make deals work

These approaches helped some buyers enter the market, but they also introduced more risk. When interest rates rose quickly, many of those decisions became painful.

Why the stress test existed in the first place

It is important to acknowledge that the stress test did what it was designed to do.

During the recent rate hiking cycle:
• Mortgage defaults remained low
• The banking system stayed stable
• Widespread foreclosures did not occur

The policy protected both lenders and many borrowers during a period of rapid change.

What OSFI is shifting toward

Regulators are now looking at a different way to manage mortgage risk.

Instead of stress testing every borrower at an inflated rate, the focus is shifting toward loan-to-income limits at the bank level.

Under the proposed framework:
• Banks would still be allowed to issue higher loan-to-income mortgages
• Only a limited percentage of those loans could exceed roughly 4.5x income
• Once that quota is filled, loans become harder to approve or are priced differently

This approach manages risk across the system rather than applying the same stress test to every borrower.

What this could mean in practice

If these changes are implemented, 2025 is expected to be the final year the stress test exists in its current form, at least for uninsured mortgages.

For buyers with 20% down, the stress test could be removed or meaningfully softened if income-based limits fully replace it.

Approvals would become:
• More predictable
• More closely tied to real income
• Less distorted by blanket rate assumptions

Why first-time buyers may benefit most

The group most likely to benefit are buyers with:
• Good, stable income
• Smaller down payments
• Stress test constraints as their main hurdle

If the stress test is no longer the primary gatekeeper, borrowing power for this group could improve quickly.

This does not eliminate responsibility or risk, but it changes how approvals are calculated.

Important context and tradeoffs

There are important realities to keep in mind.

• Some of the benefit may be absorbed into prices over time
• Buying a home remains a major financial commitment
• Buyers should still stress test themselves personally

The goal of the new framework is not easier borrowing at all costs. It is more targeted risk management.

What about investors and unconventional borrowers

This shift is not equally beneficial for everyone.

Borrowers with:
• High assets or equity
• Lower reported self-employed income

May not benefit as much from loan-to-income limits. In some cases, those limits may be more restrictive than the current stress test.

Alternative programs and specialized lending options may remain important for this group.

Final thoughts

The mortgage stress test played an important role in stabilizing the housing system during a volatile period. It also made entry-level buying difficult for many Canadians without family support.

If the system shifts toward income-based limits, first-time buyers with stable income stand to benefit the most.

This is not a green light to stretch beyond comfort, but it is a meaningful change in how approvals may work going forward.

Buyers should stay informed, run their own numbers conservatively, and understand how these changes apply to their situation.