By Nichola Saminather and Fergal Smith

TORONTO, Feb 18 (Reuters) - Canada on Tuesday announced a change to a three-year-old financial stress test designed to reduce risky mortgage lending, potentially reigniting housing markets the measure was meant to cool.

The change, shifting away from banks' public rates that tend to be higher than market rates, could allow consumers to borrow more at a time when Toronto and Vancouver, Canada's two biggest housing markets, are rebounding.

The new benchmark for home loans with downpayments of less than 20% will be the weekly median five-year fixed insured rate calculated from mortgage insurance applications, the finance department said in a statement. Taking effect on April 6, it replaces the Bank of Canada's five-year posted benchmark rate.

"This is a move in the right direction; it makes the rate more reflective of the changes in the market," said Benjamin Tal, deputy chief economist at CIBC Capital Markets. "It will not address all the issues... because when interest rates go up, the stress test can be... too restrictive."

Borrowers will still need to show they can afford a rate two percentage points higher than the benchmark.

Five-year market fixed rates are a little less than 3%, making the qualifying rate below 5%, said James Laird, co-founder at Ratehub.ca, which compares rates on mortgages, insurance and credit cards. The Bank of Canada's posted five-year mortgage rate is 5.19%.

"Once this change comes into effect on April 6, (Canadians) can expect to qualify for a little bit more than they could before if they are an insured or insurable buyer," Laird said.

The Office of the Superintendent of Financial Institutions (OSFI) is also seeking input on a proposal to make the same change for mortgages with downpayments of more than 20%, Canada's main financial regulator said in a separate statement.

OSFI introduced a stress test for such mortgages, known as B-20, in January 2018 to ensure banks maintained vigilant mortgage underwriting standards when home prices were climbing at a breakneck pace in Toronto and Vancouver.

While the rules did help cool housing markets, a supply shortage is again lifting prices.

Canada's biggest banks did not immediately respond to requests for comment.

The rate will be calculated by the Bank of Canada, published on a Wednesday to come into effect the following Monday, the statement said.

The National Housing Agency insures mortgages with downpayments of less than 20% of a home's sale price.

(Reporting by Nichola Saminather and Fergal Smith; Editing by Tom Brown and David Gregorio)

((Nichola.Saminather@thomsonreuters.com; +1-416-687-7604;))

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