The stress test requires borrowers to qualify at a rate of either 5.25% or two percentage points above their contract rate – whichever is higher. While that proved largely unproblematic with interest rates resolutely low throughout the pandemic housing market boom, recent developments have seen most borrowers required to show that they can afford a rate well above 5.25%.
Stress test reform has already taken place this year in the United Kingdom, where the Bank of England indicated during the summer that it would no longer require borrowers to show that they could afford a higher payment than their agreed rate.
A fall in interest rates could provide some relief in Canada for buyers or those looking to refinance, although that’s not likely to take place anytime soon. If anything, rates look set to climb even higher in the coming months.
“The fundamental story is that inflation is high and interest rates need to go up to get that under control,” Forbes said. “Short term, that’s going to reduce affordability because the interest will be higher on mortgage payments.
“Longer-term prices will adjust somewhat, and that will help affordability. And then, of course, interest rates will start to fall once again, once inflation is under control, and that’ll fundamentally [be when] affordability really starts to improve once again.”