UPDATE: OSFI drops stress test requirement for uninsured mortgage renewal switches

This post was first published on September 26, 2024, and was updated on December 17, 2024.

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.

First announced by Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI) in September, the removal of the stress test for mortgage borrowers switching to a new lender at the end of their term is now in effect. The change applies to borrowers making a “straight switch” (meaning the original mortgage size and amortization period doesn’t change). Of course, borrowers will still need to go through the usual mortgage qualification process with their new lender, but will do so at their contract rate, rather than the Minimum Qualifying Rate (MQR). This in turn will lower the amount of income they'll need to qualify for a better mortgage renewal rate, which can help save thousands of dollars over the course of their mortgage.

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 mortgage 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.”

Update: Insurable mortgages now included in stress test exemption

When this most recent stress test exemption was announced in November, it made no mention of insurable mortgage borrowers. These are borrowers who have made a 20% or larger down payment and have a home price capped at $1 million. While considered to be low-ratio and originally uninsured, lenders can have the option of taking out their own insurance on these loans, which allows them to further securitize them as investments (this is a common method for funding for smaller lenders, that don't have the diversified income streams that the big banks do.)  However, this was clarified on December 16, when the federal government released its Fall Economic Statement. In it, the Department of Finance confirmed that the stress test exemption for straight renewal switches will also apply to insurable mortgages, as long as they originated at a federally-regulated financial institution.

Also read:

• Insured vs. uninsured mortgages
• The mortgage stress test: Everything you need to know
• How to stress test your mortgage
• Mortgage renewal calculator
• Renewing your mortgage in 2024? Here’s what to expect