A mortgage applicant approaches you with a strong credit score and a 20% down payment for a principal residence. Their Gross Debt Service (GDS) ratio calculated at the contractual mortgage interest rate is 32%, and their Total Debt Service (TDS) ratio is 40%. The posted five-year fixed rate for their chosen lender is 5.25%, while the Bank of Canada's qualifying rate for uninsured mortgages is 5.35%. Based on the B-20 guidelines, which of the following best describes the outcome of their mortgage qualification under the stress test?

Question: A mortgage applicant approaches you with a strong credit score and a 20% down payment for a principal residence. Their Gross Debt Service (GDS) ratio calculated at the contractual mortgage interest rate is 32%, and their Total Debt Service (TDS) ratio is 40%. The posted five-year fixed rate for their chosen lender is 5.25%, while the Bank of Canada's qualifying rate for uninsured mortgages is 5.35%. Based on the B-20 guidelines, which of the following best describes the outcome of their mortgage qualification under the stress test?

Answer options:

• The applicant will qualify as their GDS and TDS ratios meet the thresholds when calculated at the greater of the contractual rate + 2% or 5.25%. ✅ The applicant will not qualify because the stress test requires calculating GDS and TDS at the greater of 5.25% or the Bank of Canada's qualifying rate, which pushes their ratios above the limits.
• The applicant will qualify because the stress test only applies to insured mortgages, and they have a 20% down payment.
• The applicant will not qualify due to their TDS ratio exceeding the 40% threshold, regardless of the stress test application.

Correct answer: The applicant will not qualify because the stress test requires calculating GDS and TDS at the greater of 5.25% or the Bank of Canada's qualifying rate, which pushes their ratios above the limits.

Explanation: Under OSFI's B-20 guidelines, for uninsured mortgages, borrowers must qualify at the greater of the contractual mortgage rate plus 2% or 5.25%. In this scenario, applying 5.35% (the BoC qualifying rate or contractual + 2%) would increase the calculated GDS and TDS, making it likely they would exceed the qualification thresholds of 32% and 40% respectively, thus failing the stress test.