The mortgage stress test and pre-approval: how lenders decide how much you can borrow

“With my income, how expensive a home can I buy?” is the most common question in a first meeting. The answer comes not from home prices but from two rules: the stress test, which checks you at a rate higher than your real one, and the income limits on housing costs and total debt (GDS and TDS). This post explains those rules from the official sources and works through an example at $10,000 of monthly income. It is general information; your bank or mortgage broker sets the real number after seeing your documents.

The answer first: three things that set your limit

The smallest of the three results is your limit. Credit score (CMHC asks for 600 or more), the source of the down payment and your type of employment are checked separately.

What the stress test is

The bank does not calculate at the rate you will sign (say 4.5%) but at a higher one. In its December 12, 2023 release, OSFI (the federal regulator of financial institutions) said the minimum qualifying rate (MQR) for uninsured mortgages would remain the greater of 5.25% or the contract rate plus 2%. For insured mortgages (less than 20% down) the rate is set by the Department of Finance, and CMHC’s requirements use the same formula.

OSFI explains the reason this way: it is a safety buffer so that homeowners can keep paying even if rates rise or income unexpectedly falls. For the borrower it is the rule that shrinks the limit, but it is also the filter that keeps you able to cope when rates go up later.

With contract rates in the 4% to 5% range in November 2026, the qualifying rate is in the 6% to 7% range. The Bank of Canada raised its policy rate to 2.5% on October 28, which moves variable rates too, so ask at pre-approval which rate was used to qualify you.

What GDS 39% and TDS 44% add up

• GDS (gross debt service ratio): mortgage principal and interest, property taxes and heating (P.I.T.H.), plus 50% of condo fees if it is a condo, divided by gross household income. Under CMHC’s rule it must not exceed 39%.
• TDS (total debt service ratio): the housing costs above plus other debt payments such as car loans, student loans and minimum payments on credit cards and lines of credit. It must not exceed 44%.
• Both ratios use the mortgage payment calculated at the stress-test rate, so a larger number than you will actually pay goes in.
• Income is gross (before tax) and is usually proven with pay stubs, T4s and tax returns. Self-employed borrowers usually show two years of reported income.

Worked example: gross monthly income of $10,000

These are reference estimates using the semi-annual compounding used for Canadian mortgages. Assumptions: property tax $400 a month, heating $100, condo fees $500 (half counted, $250).

Same income, but the stress test cuts the limit by about $99,000. TDS matters too: with a $500 car payment and a $100 minimum card payment, the $4,400 total-debt limit (44%) minus $600 leaves $3,800 for housing, and the room for the mortgage payment drops to $3,050.

What a pre-approval is, and is not

• A pre-approval is the lender looking at your income, debts and credit and telling you in advance roughly how much it could lend and at what rate. It usually holds a rate for a set period (a rate hold).
• According to FSRA (Ontario’s financial regulator), a pre-approval is not a guarantee that the lender will enter into a mortgage contract with you. After looking closely at you and the property, it may decide not to lend.
• The real approval comes as a commitment letter (approval letter). FSRA explains that it means financing has been officially approved and that, once signed, it is a formal contract with the lender. A financing condition in your offer is normally waived only after you receive it.
• Ask at pre-approval: which rate was used to qualify you, how many days the rate hold lasts, which documents are still needed, and whether the limit changes by property type (condo, new build, with rental income).

Common mistakes

• Reasoning that “the payment is about my rent, so I will pass”: the bank uses the qualifying rate, so you must pass at a payment larger than the real one.
• Treating the pre-approved amount as final and writing an offer with no conditions: do not drop the financing condition before the commitment letter arrives (if a competing offer forces it, talk to your broker first).
• Taking a new car loan or making a big credit card purchase after you start house hunting: TDS rises and extra credit checks can cut your limit.
• Calculating only as an insured mortgage when your down payment is just under 20%: at 20% or more there is no premium and the amortization options differ, so the result changes. Run both cases.