Canada’s stress test for uninsured mortgages has been under fire from the real estate industry, but it appears policymakers are unlikely to budge and scrap the year-old measure.

There may, however, be ways to change the mortgage stress test to help homebuyers without getting rid of it altogether, experts suggest. In fact, a recent report suggests regulators are considering adjusting the rules, which currently require mortgage applicants to qualify at higher rates than they are actually signing on for, sending shockwaves through the housing market.

The impact on market activity has been palpable, with Canadian home sales down 4 percent on a year-over-year basis as of January. So what exactly should policymakers do as they weigh debt-related risks to the economy and the health of the housing market? Here’s what experts are saying the changes should look like.

Lower the stress test

The stress test introduced last January in an effort to cool the housing market requires uninsured mortgage borrowers to qualify at either 200 basis points over their contract rate or match the Bank of Canada’s five-year benchmark rate, whichever is higher. Previously, stress testing only applied to insured mortgages, so if a borrower could muster a 20 percent downpayment to avoid mandatory mortgage insurance, they could sidestep the stress test, too.

While industry group Mortgage Professionals Canada supports a stress test, its CEO Paul Taylor says the threshold should be lowered. “We’ve always been advocating for a bit of a reduction, we’ve never advocated for an elimination of it,” he says. Taylor says the test should be loosened to 75 basis points above the contract rate. Given the most common mortgage type is a five-year fixed-rate, borrowers have years to build equity before they need to renew at a new rate. Household incomes also generally increase over time. That gives a homeowner some flexibility in the face of potentially higher rates in the future.

Continue to read: Livabl_