Should Canada abolish the mortgage stress test? What experts say

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

This has led some in the industry to call for an end to stress testing – a tool that determines whether a person is eligible for a mortgage. But would that be a good idea?

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

“First-time home buyers have virtually disappeared from the market. And I think that's largely due to the stress test that's still in effect. It was introduced in 2017 in anticipation of rising interest rates,” he told Global News.

Before someone borrows money from a government-regulated lender, such as a bank, they must prove they can afford the repayments at a qualifying interest rate. Typically, this rate is higher than the actual interest rate in a mortgage contract.

This is called a “stress test.”

The stress test requires borrowers to qualify for a mortgage at an interest rate of 5.25 percent or two percent above the contract rate, whichever is higher. Borrowers must demonstrate that they could afford higher monthly payments if the base rate were to rise rapidly.

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In March, the Competition Bureau recommended dropping the stress test requirement for some borrowers, arguing that it would limit Canadians' ability to shop around for a better interest 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 suspending the stress test. First-time home buyers essentially have to qualify at seven percent,” he said.

However, some experts also urge caution.

Clay Jarvis, real estate expert and spokesperson for NerdWallet Canada, said that while eliminating the stress test could help real estate companies sell more homes, it could lead to unintended consequences.

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“This will drive up real estate prices again. We don't need that,” Jarvis said.

“The stress test is not intended to help sell more homes. It is intended to help people stay in their homes.”

“Let's say we turn off the stress test tomorrow. Then it suddenly becomes much easier to qualify for all mortgages. But that's just instant competition. And what happens when the market is competitive? Then you'll have bidding wars again. Suddenly prices will be driven up further and faster than they have in recent years.”

Alexander said there could not be a one-size-fits-all policy to ensure that first-time buyers are brought back in some markets while maintaining checks and balances in others.

He said the stress test could still make sense for booming real estate markets, but not for others.

“The stress test might make sense in Alberta, but in other markets where (the real estate market) is facing challenges, we should think about tailored, different measures,” he said.

The start of interest rate cuts by the Bank of Canada has not done much to fuel the recovery in Canada's housing market, new July data shows this week.

Despite a “mixed” summer for residential real estate, experts speaking to Global News expect lower borrowing costs to bring many buyers back into the business this fall as more affordable properties open up in some markets across Canada.

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