Amid heightened interest rates and a diminished probability of another series of hikes from the Bank of Canada, one economist says it is time for the federal government to review its mortgage stress test. 

“This [high interest rates] will (or should) be an important consideration when Ottawa decides on potential adjustments to the mortgage stress test’s minimum qualifying rate (MQR) on December 15. Whether there will be any changes made to the size of the MQR’s hefty buffer is another matter,” Robert Hogue, an assistant chief economist at Royal Bank of Canada, said in a note to investors on Dec. 5.

The Office of the Superintendent of Financial Institutions (OSFI) left the minimum rate unchanged in its scheduled policy update on Thursday, meaning prospective homebuyers still have to show they can afford loans at interest rates higher than seven per cent.

Despite the falling probability of another series of rate hikes from the central bank, Hogue said that policymakers will likely look to “maintain a high degree of stringency” to keep systemic risks to a minimum amid economic uncertainty. 


The stress test was initially put in place in 2018 as a way to sure up mortgage underwriting practices against concerns regarding rising home prices and high household debt. 

The stress test dictates that federally regulated lenders are required to ensure potential homebuyers can afford their mortgage even if interest rates were to increase, according to Hogue. 

In its current form, the MQR is the higher number of either 5.25 per cent or the contract rate plus two percentage point. 

“This rate has frustrated potential homebuyers with less than stellar borrowing credentials—some of whom are no longer able to get a mortgage from federally-regulated lenders (at least temporarily). It’s also impacted stronger borrowers by reducing the maximum size of mortgage they qualify for,” said Hogue. 

Despite frustrated prospective homebuyers, Hogue said the stress test is also meant to safeguard against other risks, like a drop in a mortgage owner’s income or a potential recession. 


However, Hogue said it is unlikely that interest rates will increase by another 200 basis points and following this year's rate increases the test has been made more difficult to clear. 

“Clearly the stringency of the test has significantly increased. Has it become overly stringent in the current (and foreseeable) circumstances?” he questioned. 

Despite the potential argument to ease the stress test, Hogue said it is more likely for the federal government to “err on the side of caution” by keeping the buffer at two percentage points. 

“We also suspect they would beleery of any moves that might ultimately stimulate housing demand at this stage—or go against the Bank of Canada’s efforts to cool our economy down to tame inflation,” he said. 


Preceding seven interest rate hikes from the Bank of Canada, when interest rates were low, Hogue said it made “perfect sense” to test potential borrowers to see if they could withstand a sharp increase in interest rates. He said the 350-basis-point increase in interest rates over the past eight months is evidence of that need. 

“The subsequent shock now confronting borrowers is exactly what the test was designed to protect against. It has enhanced both their resilience and that of Canada’s financial system,” Hogue said.