In lending and mortgages, a stress test is a financial assessment used by lenders to ensure that borrowers can still afford their mortgage payments even if interest rates rise significantly. The goal is to reduce the risk of borrowers defaulting on their loans due to future financial stress caused by higher rates.

Here’s how it works:

• Lenders evaluate the borrower's ability to make mortgage payments not only based on the current interest rate but also on a higher, hypothetical rate (the stress test rate).

• In Canada, for example, borrowers are tested at either the Bank of Canada's qualifying rate (typically higher than market rates) or the mortgage contract rate plus an additional buffer, whichever is higher.

By applying the stress test, lenders ensure that borrowers can afford their mortgage even under tougher financial conditions. This is particularly important for variable-rate mortgages, where payments could increase as rates rise.

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