Refinancing and the stress test: top-ups and HELOCs

Do you have to pass the stress test to refinance?

Yes. Refinancing, adding a top-up to your mortgage or opening a new home equity line of credit (HELOC) is new borrowing, so the lender underwrites you again. The Financial Consumer Agency of Canada says existing owners must pass the stress test again to refinance or take out a HELOC, at the greater of 5.25% or the negotiated rate + 2 points.

This is the opposite of a renewal. Renewing with your lender, or a straight switch with the same balance and amortization, isn't retested (see renewals and straight switches). The moment you add money or years, you're back to qualifying at the higher rate.

One honest note on sourcing. OSFI's rule says the qualifying rate applies to "most newly underwritten residential mortgages", and Guideline B-20 treats a refinance as new underwriting with fresh documentation and a recalculated loan-to-value. We couldn't find OSFI text that names HELOCs and refinances in the qualifying-rate rule itself, so we rely on FCAC for that point.

How much equity can you borrow against?

Before income even matters, Guideline B-20 limits how much a federally regulated lender can lend against your home:

Quebec's caisses follow the AMF, not OSFI, but the AMF's guideline uses the same 65% cap on the non-amortizing part of a HELOC and the same contract + 2 points or 5.25% qualifying rate.

Would a $75,000 top-up pass? A worked example

The 80% cap says what the lender may lend; the stress test decides what you qualify for. Here's one household asking for $75,000 to renovate.

How much can you refinance and still pass?

The table holds the home, the balance and the $650 of debts fixed and changes only income. Every row is tested at 6.58%.

At $90,000 the household fails before borrowing a dollar: its GDS at 6.58% would be 42.6% on the existing balance re-amortized over 25 years. It can still renew or straight-switch without being tested, which is why those exemptions matter.

The 80% cap only becomes the limit at $180,000 of income. Below that, the stress test decides. Between $130,000 and $150,000 of income, each extra $10,000 a year adds about $54,000 of borrowing room: new money is tested at 6.58% over 25 years, so it uses up ratio room fast.

Does folding a car loan into the refinance help?

It's the obvious next idea: borrow the $24,000 left on the car as well, pay it off, and the $500 payment disappears from TDS. Whether the lender stops counting that payment depends on how the payout is handled, so ask. If it does, here's what changes:

Folding the car in fixes TDS but breaks GDS. The car payment leaves the "other debts" line, yet the $24,000 lands in the mortgage, where the lender tests it at 6.58% as a housing cost. The most this household can borrow with the car folded in is $94,500, which leaves $70,500 for the renovation, about the same as the $71,000 it could get without touching the car. Consolidation tidies up the payments; it doesn't create room under the test.

How does a HELOC count against your ratios?

A line of credit secured on your home counts as a debt payment in your TDS ratio even if you only pay interest. For insured mortgages, CMHC counts a secured line of credit, including a HELOC, at no less than a 25-year amortized payment on the balance.

For a sense of scale, a $50,000 balance spread over 25 years at 5.25% is about $298 a month. On the example household's $118,000 income that adds roughly 3.0 points to TDS, which this household doesn't have to spare. The rate lenders use for that payment varies, so treat this as an estimate.

For uninsured lending, OSFI lets each lender set its own debt-service method. Ontario's credit-union guidance addresses HELOCs directly: it expects the qualifying payment to include HELOC terms "stress tested at the qualifying interest rate", without saying what that rate is.

What do people get wrong about refinancing?

• "We have $420,000 of equity, so we can borrow it." The 80% cap leaves $260,000, and the stress test may allow much less.
• "Adding money at renewal is just a renewal." Any extra money or extra years is new lending, tested at the qualifying rate.
• "A HELOC with interest-only payments won't hurt our ratios." For insured mortgages CMHC counts it at a 25-year amortized payment, and B-20 asks uninsured lenders to calculate their own ratios conservatively.
• "Consolidating debt always helps us qualify." As the table above shows, it can swap a TDS problem for a GDS one.

What can you do if you don't pass a refinance?

• Borrow less. In the example, $71,000 passes where $75,000 doesn't.
• Pay down other debts first, with cash you have. Each monthly payment you remove frees room in TDS at the qualifying rate. Our guide to passing the stress test ranks the levers.
• Wait for renewal and switch for rate alone. If the goal is a lower payment rather than cash, a straight switch to a better rate isn't tested. Check whether an offer is a good rate first.
• Look outside federal rules, carefully. Some provincial credit unions set their own buffer, and private lenders aren't bound by B-20, usually at a higher cost. Our guide to B-lenders and private lenders covers the trade-offs.

Refinancing before your term ends can also trigger a prepayment penalty, which varies by lender and contract. Ask for the figure in writing and add it to the cost. Our sibling site RefinanceCalculator.ca estimates the penalty and whether breaking, blending or waiting comes out ahead. You can model your own balance, rates and income in the renewal and switch checker, which shows whether the refinance path passes.