Should Canada ditch the mortgage stress test? What experts are saying

Despite recent interest rate cuts, the Canadian real estate market remained slow this summer.

This has prompted some in the industry to call for an end to the stress test – a tool that determines whether a person can qualify for a mortgage. But would it be a good idea?

Christopher Alexander, president of Re/Max Canada, is among those calling for an end to the stress test.

“First-time homebuyers have all but disappeared from the marketplace. And I think that’s largely due to the stress test which is still in place. It was introduced in 2017 in anticipation of rising interest rates,” he told Global News.

Before someone borrows money from a federally regulated lender, like a bank, they need to prove they can afford payments at a qualifying interest rate. Typically, this rate is higher than the actual rate in a mortgage contract.

This is referred to as the “stress test.”

The stress test requires borrowers to qualify for a mortgage at a rate of 5.25 per cent or two per cent above the contract rate, whichever is higher. Borrowers need to prove they could handle higher monthly payments if the central bank rate rose rapidly.

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In March, the Competition Bureau recommended dropping the stress test requirement for some borrowers, arguing it limits Canadians’ ability to shop around for a better rate.

Alexander said the stress test hits potential first-time buyers the hardest.

“With further cuts on the horizon, I think it’s time for policymakers to consider pausing that stress test. First-time homebuyers are being forced to essentially qualify at seven per cent,” he said.

However, some experts are also urging caution.

Clay Jarvis, real estate expert and spokesperson for NerdWallet Canada, said that while getting rid of the stress test might help real estate firms sell more houses, it could lead to unintended consequences.

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“It’s going to drive home prices back up into the stratosphere. We don’t need that,” Jarvis said.

“The stress test is in place not to help sell more homes. It’s to help keep people in their homes.”

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“Let’s say we turned off the stress test tomorrow. Well, all of a sudden everybody’s mortgages get a lot easier to qualify for. But that’s just instant competition. And what happens when the market is competitive? You see bidding wars again. All of a sudden, we will see prices just getting pushed up further and faster than we’ve seen in the last few years.”

Alexander said one way to ensure that first-time buyers are brought back into some markets, while maintaining checks and balances in others, is not having a one-size fits all policy.

He said the stress test might still make sense for housing markets that are booming, but not for others.

“The stress test might make sense in Alberta, but in other markets where (the housing market is) challenged, we should consider different policies that are tailor-made,” he said.

The start of interest rate cuts from the Bank of Canada has done little to stoke a fire in the Canadian housing market, fresh data from July showed this week.

Despite a “spotty” summer in residential real estate, experts who spoke to Global News expect lower borrowing costs will bring many buyers back into the fold this fall as pockets of affordability open up in some markets across Canada.