BREAKING NEWS: OSFI drops stress test requirement for mortgage renewal switches
Key takeaways
- As of November 21, 2024, all mortgage borrowers switching to a new lender upon renewal will be exempt from the stress test, as long as their mortgage size and amortization doesn’t change.
- Canada’s banking regulator made this policy change to address the “imbalance” between how insured and uninsured borrowers are treated at renewal.
- The change will improve competition in the mortgage marketplace, and incentivize borrowers to shop around for their best options at renewal time.
Thinking of switching lenders when renewing your mortgage? The good news is you’ll no longer be stress tested when doing so – even if you’re an uninsured borrower.
Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI) announced this week that it intends to drop the stress test requirement for anyone moving to a new lender at renewal time, so long as it’s a “straight switch” (meaning the original mortgage size and amortization period doesn’t change).
The change will go into effect on November 21st. Prior to this, uninsured borrowers (those who’ve put more than 20% down on their home purchase) were still subjected to the stress test if they wanted to go with a different bank for a new term. Insured borrowers (those with smaller down payments and who have taken out mandatory mortgage default insurance) have been exempt from the stress test requirement since January 2024.
Also read: Insured, insurable and uninsured borrowers – what’s the difference?
What is the mortgage stress test?
The mortgage stress test requires borrowers getting new mortgages to prove they could afford to make their payments in the case that interest rates increase. Borrowers must have the income and debt ratios to pass the Minimum Qualifying Rate (MQR), which is currently 5.25%, or their contract rate plus 2% – whichever is higher.
Given both fixed and variable mortgage rates have been in the 5 - 6% range in recent years – and well above 3.25% – all mortgages have been stress tested at plus 2%, meaning many borrowers have had to pass a stress test of between 7 - 8%. That’s made it much tougher for a borrower to qualify if leaving their current lender at renewal.
Also read: The mortgage stress test: Everything you need to know
Stress testing borrowers at renewal has been controversial
Requiring that borrowers pass the MQR when switching lenders at renewal has been a point of contention ever since the stress test was first introduced back in 2018. The mortgage industry pointed out that requiring it effectively removed competition from the mortgage marketplace, as borrowers would be less likely to shop around for better options at renewal, and that lenders would be less incentivized to offer better rates for switchers. (Those who stick with their existing lender usually are not re-stress tested, unless their profile as a borrower has considerably worsened.)
OSFI’s argument at the time was that when a borrower changes lenders, it creates a new loan which needs to be fully underwritten. The mortgage industry argued that, given all aspects of the mortgage in question remained the same, that there was no need to subject switching borrowers to the stress test, since they already were when they first got their mortgage.
When the requirement was dropped for insured borrowers, it was cause for celebration within the mortgage industry – but that it didn’t yet apply to uninsured borrowers continued to draw criticism.
A change of heart from OSFI
Previously, OSFI head Peter Routledge has defended the regulator’s decision to continue stress testing uninsured borrowers, saying that while he acknowledged an “imbalance” between the two types of borrowers at renewal, uninsured borrowers still required testing as they were creating new loans at another lender, and were riskier because they didn’t have the backing of mortgage default insurance.
However, in an exclusive interview provided to the Globe and Mail, Routledge has changed his stance, telling reporter Rachelle Younglai, “There isn’t reckless underwriting in straight switches.”
The Globe reports that it was this “imbalance” between how the two types of borrowers were being treated at renewal that prompted the change.
“If I were that Canadian walking in with an uninsured mortgage, I kind of feel like that was an imbalance that wasn’t fair,” Routledge added. “Part of our job is to enable banks and lenders to take reasonable risks. And part of that reasonable risk-taking may involve treating an uninsured mortgager at renewal for a straight switch the same as an insured.”
A few outstanding questions
In general, this is great news for the Canadian mortgage marketplace, and for all borrowers looking to explore their options at renewal time; shopping around for the best rate can save borrowers literally hundreds of thousands of dollars over the lifetime of their mortgage, and their renewed ability to do so will incentivize lenders to offer more competitive rates to entice switchers.
However, there are still a few outstanding questions:
- Insurable mortgage borrowers (those who have paid more than 20% down, but opt to take out an insured rate because they satisfy the purchase price and amortization maximums of an insured mortgage) are not explicitly mentioned in the current coverage of the announcement. Will they be included in this exemption?
- Those in collateral mortgages (mortgages that include a re-advanceable line of credit) are generally not able to switch lenders during their mortgage without it being considered a refinance. Does this new policy put lenders who mainly offer these mortgage types at a disadvantage?
We’ll be sure to report back and update this post as additional details for borrowers come to light.
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Penelope Graham, Head of Content
Penelope has over a decade of experience covering real estate, mortgage, and personal finance topics and her commentary on the housing market is featured on both national and local media outlets.