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

Before someone borrows money from a federally regulated lender, like a bank, they need to prove they can afford payments at a qualifying rate. This is called a 'stress test.'

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.

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.