OTTAWA -- A new stress test rate for mortgages of 5.25 per cent takes effect in Canada as of June 1.

The federal government is raising the rate from 4.79% in an attempt to cool the currently raging housing market.

“We have to make sure you can pay for a house using a higher interest rate than you actually will,” says Kyle Miller, a mortgage agent with Mortgage Brokers Ottawa. Miller says the higher stress test rate will reduce the buying power of bidders who submit offers significantly over asking price.

“They’re looking to cool off the market, and by forcing people to qualify at a higher rate, that’s going to limit how far their money goes, which is going to limit how much they can actually bid on a house,” says Miller.

For the average home buyer in Ottawa, it means significantly less money will be available for pre-approvals. In the month of April, the average home price in Ottawa was $758,800. On May 31, a family making a household income of $145,000 could be approved for that average home price with the minimum down payment. But as of June 1, that same family with a minimum down payment would only be approved for $720,900 due to the higher stress test rate. That’s $37,900 less that family would be approved for to spend on a house.

“It’s definitely bad news for people who are at the top end of their budget,” says Miller, and that’s where buyers seem to be spending.

“My experience with buyers is people always buy to the end of their pre-approval,” says Paul Lavictoire, a sales representative with Keller Williams VIP Realty in Arnprior. “So if you’re pre-approved for $600,000, people buy at $600,000.”

Lavictoire says that means buyers will have to reel in their budgets and expectations.

“So if it takes your pre-approval down and you’re thinking you want to buy a $600,000 house, you may be looking at a $550,000 house now,” says the valley realtor.

So what does that mean for the future of house prices, which seem to be forever climbing?

“A more difficult stress test will certainly slow the market to some degree,” says Robert McLister, a Mortgage Editor with RATESDOTCA.

McLister says the long term effects of the higher stress test rate are too hard to predict, but the short term effects will be seen immediately.

“You’re going to see people asking mom and dad for more money, getting a co-borrower, buying a smaller house, less desirable house, a house that’s further away from the city, longer commute, or a house that needs work.”