A new mortgage rule will to make it dramatically harder to borrow for a mortgage.

Bill Moreau, Canada’s finance minister, announced today that borrowers will have to qualify at the Bank of Canada rate on all insured mortgages – those with less than a 20 per cent down payment.

Today that rate is 4.64 per cent which means clients will qualify for far less money than they would under current rules.

The new mortgage rule is designed to “stress test” borrowers to ensure they can afford their mortgage if and when interest rates increase in the future.

Higher mortgage rates at renewal would cause home owners to suddenly face higher monthly payments. That could cause serious problems in the housing market and other parts of the economy.

Right now clients who want an insured five year fixed rate qualify at the contract rate. A typical full-feature, five year fixed rate today is around 2.39 to 2.49 per cent.

Under current rules only variable rate mortgages and fixed rates with a term less than five years were qualified using the Bank of Canada qualifying rate and investment lending.

The rule change is sure to dampen housing markets across the country because it significantly reduces the amount a buyer can borrow and therefore pay for a home.

It seems the whole country – including markets that are flat or down this year – will get a dose of medicine that is really aimed at the frothy Vancouver and Toronto housing markets.

The new rules are supposed to begin Oct 17th but it is common for lenders and insurers to implement qualifying rule changes ahead of schedule.

It’s unclear at this point whether buyers with down payments of 20 per cent or more are also impacted by the rule change.

There had been speculation that rule changes would focus on increased down payments but there are no changes on that front at this time.