New rules coming in January could disqualify up to 10 per cent of prospective home buyers who have down payments of 20 per cent or more, the Bank of Canada says.

The new rules will likely cause those buyers to settle for smaller homes, put more money down or delay buying. Some may also take out riskier loans from alternative lenders that are not federally regulated, including credit unions and private mortgage lenders, the central bank said on Tuesday in its twice-yearly review of the financial system.

The change will require those applicants to prove they could still afford their mortgage payments if interest rates were raised two percentage points, a procedure called a stress test.

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The restrictions would affect about $15-billion a year in new borrowing, particularly in Toronto and Vancouver – markets that have had the steepest run-up in prices in recent years. The tighter rules could disqualify as many as 12 per cent of borrowers in the two cities, which account for half the value of homes sold in Canada.

Stress tests are already mandatory for mortgages in which the down payment is less than 20 per cent. The federal Office of the Superintendent of Financial Institutions announced in October that it will extend the tests to mortgages that have down payments of 20 per cent or more of the purchase price – known as low-ratio mortgages – to make sure the borrowers can cope with higher interest rates.

The Bank of Canada expects the impact to be less severe than changes made in 2016 that raised the cost of high-ratio insured mortgages, for which borrowers put down less than 20 per cent. The bank's 10-per-cent figure represents the share of low-ratio mortgages issued in the 12 months ending in June, 2017, that would not have qualified under the stress test. The impact is higher in Toronto and Vancouver because such mortgages make up a larger share of those markets and prices are higher.

"The new rule will have some impact, but it is unlikely to derail the housing market on its own," Bank of Montreal economist Benjamin Reitzes said. "We'll need higher rates for that."

The stress test could eat into the buying power of the most-stretched borrowers by up to 15 per cent, Mr. Reitzes said in a research note.

Tim Hudak, CEO of the Ontario Real Estate Association, said the OSFI rule change and other recent housing-policy measures will be hard on buyers.

"The cumulative amount of government intervention in the housing market means that many people will no longer be able to buy their first home or upsize when the kids come along," Mr. Hudak said. "The piling on of federal, provincial and local government interference risks not only hurting aspiring homeowners, but damaging the broader economy when fewer homes are purchased, furnished and renovated."

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Over all, the Bank of Canada said in its review that the main threats – rising household debt and overheated house prices – remain elevated. The threat level has been about the same since 2013.

But for the first time in a while, the bank sees "preliminary signs of improvement" in the quality of new lending triggered by the improving economy, higher interest rates and tighter mortgage rules announced in 2016.

"Our financial system continues to be resilient, and is being bolstered by stronger growth and job creation, but we need to continue to watch vulnerabilities closely," Governor Stephen Poloz said in a statement accompanying the bank's Financial System Review.

The Bank of Canada's cautiously optimistic tone comes amid evidence that higher rates and tighter lending standards are helping to cool the housing market and stem riskier borrowing. For example, fewer Canadians with extremely high debt levels are taking out mortgages with little money down.

The report suggests most borrowers could handle a "moderate increase" in mortgage rates, especially if their incomes also rise. Nearly half of outstanding mortgages in Canada face an interest rate reset within the next 12 months.

"The Bank of Canada sees things moving in the right direction," Toronto-Dominion Bank economist Brian DePratto said in a research note.

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The rate of the increase in house prices across the country slowed to 10 per cent a year in October after a significant slowdown in Toronto. Prices are heating up again in Vancouver, particularly in the condominium market, the bank said.

The housing markets in both cities took a hit from the introduction of taxes on foreign buyers. Vancouver's started to recover early this year, with the average price of a detached house last month at about $3-million, virtually identical to the record high in April, 2016. In the Greater Toronto Area, detached houses sold for an average of about $1-million in October, down 16 per cent from April.

Mr. Poloz acknowledged that the threat from high household-debt levels and the run-up in home prices will take "a long time" to work off.

Part of the problem is that buyers find ways to deal with tighter mortgage rules. When Ottawa clamped down on high-ratio mortgages in 2016, some borrowers shifted to low-ratio mortgages, which now account for three quarters of new mortgages, up from two-thirds in 2014. Many are also using home-equity lines of credit, which do not require regular interest and principal payments.

The bank said it is closely monitoring developments in the private lending market, worth as much as $15-billion a year.

Many economists and real estate industry officials anticipated the OSFI rule change could curb home sales next year. The Canadian Home Builders' Association has forecast the rule changes combined with other recent housing-sector policy reforms could reduce total house transactions by 10 per cent to 15 per cent.

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In a submission to the federal government in August, the association said that would translate into a decline in resale-home transactions of 50,000 to 75,000 units a year, while housing starts could drop by 20,000 to 30,000 units.

With a report from Janet McFarland in Toronto