Fall Economic Statement: Stress test dropped for insurable mortgage switches

On December 16, 2024, the federal government unveiled its Fall Economic Statement (FES) – and as the surprise resignation of Finance and Deputy Prime Minister Chrystia Freeland dominated headlines, the release included a few important mortgage updates that may have gone unnoticed by borrowers.

In the section titled 1.3: Lowering the Cost of Home Ownership, is a paragraph on “Removing the Stress Test at Mortgage Renewal”, which confirms that borrowers with insurable mortgages will now also be exempt from being stress tested at renewal time if they chose to move to a new lender. 

Also read: Canada’s 2024 Fall Economic Statement: What you should know

An insurable borrower – not to be confused with an insured borrower – is a mortgage holder who has more than 20% equity in their property, but with a home value capped at $1 million, and an amortization period of 25 years. Because their equity is above the 20% threshold, they’re considered “low-ratio” borrowers, meaning they do not need to take out the mandatory mortgage default insurance that insured borrowers do. However, due to the features of their mortgage, their lender can opt to take out their own coverage on these loans, and bundle them with other mortgages on their books as securitized investments. This mortgage insurance is paid for by the lender and not the borrower. These mortgages are then referred to as "portfolio-insured", or "bulk-insured."

Insuring and bundling these mortgages into investments is a key method of funding for smaller lenders, which don’t have the same kind of diverse business assets as a big bank. The benefit to the borrower is that by becoming portfolio-insured, they have access to the same lower mortgage rates that a high-ratio, insured borrower would have (insured borrowers tend to be offered the lowest mortgage rates on the market, because their built-in coverage means they pose less risk to their lender).

Why have insurable borrowers been excluded until now?

However, up until now, this particular insurable mortgage group had been excluded from the stress test switch exemption; insured borrowers have been exempt since January of this year, while uninsured borrowers were granted the ability to switch at renewal without stress testing on November 21.

“On November 21, 2024, the Office of the Superintendent of Financial Institutions (OSFI) removed the stress test requirement for uninsured mortgage holders who switch from one federally regulated lender to another. With this change, more mortgage holders can now switch lenders at renewal without requalifying,” reads the Federal Economic Statement.

“In addition, following OSFI's announcement, the government is amending the mortgage insurance rules to remove the stress test requirement for uninsured mortgage holders who switch from a federally regulated lender to a lender that purchases portfolio insurance for the mortgage.”

Who is eligible for the mortgage stress test exemption?

From a borrower’s perspective, this may all sound like unnecessary jargon – but removing the stress test for all types of borrowers looking to switch at renewal time is a meaningful change that will help improve competition within the mortgage marketplace, as borrowers can now easily jump to a new lender for a better deal. As the FES puts it:

“When the time comes to renew their mortgage, Canadians deserve a chance to shop around for a better rate from a new lender. The government believes homeowners should get a chance to find a better deal, in a more competitive mortgage market, every time they renew.”

The exemption went into effect immediately on December 16. To be eligible:

• The mortgage must have originated at a federally-regulated financial institution
• The mortgage has previously been stress tested
• The borrower is making a “straight switch”, meaning the mortgage’s original amortization schedule doesn’t change, and their original loan amount remains the same; however, the government clarified that the mortgage balance can increase by a maximum of $3,000, to cover related transaction costs, penalties, or fees. 
• No equity is being taken out of the mortgage during the switch
• The borrower must renew with a new lender at renewal time

A long-awaited fix

The practice of stress testing switching mortgage borrowers has been deeply unpopular within the mortgage industry, ever since the mortgage stress test – which requires borrowers to prove they can afford their mortgage at a rate 2% higher than their actual contract – was launched in 2018.

The argument has been that these borrowers, who have already been stress tested when they first took out their mortgages, pose little risk to a new lender, especially as most have paid off a chunk of their mortgage balance by renewal time, and have an established history of making their payments.

Stress testing a switching borrower effectively reduces the mortgage amount they can qualify for at renewal, which can be a big deterrent for borrowers. It also reduces competition within the mortgage marketplace. The fact that borrowers who stick with their existing lender at renewal generally were not stress tested gave lenders assurance that their clients were less likely to leave – and less incentive to offer these existing customers the best rates.

OSFI had argued at the time that when a borrower changes lenders, it creates a new loan that requires full underwriting. However, the regulator has since changed their stance, after several years of criticism from the industry.

Overall, this is a win for mortgage shoppers, who now have more options at renewal time, and the flexibility to make a change to their mortgage if they need to, without penalty.

Other mortgage initiatives announced in the FES

In addition to amending the rules for insurable borrowers looking to switch lenders at renewal time, the federal government also announced a few other measures, aimed at improving competition in the mortgage marketplace and reducing interest costs. These include:

• Consultations on ways to improve the structure and effectiveness of the stress test on insured mortgages.
• Reviewing how to make long-term fixed rate mortgages a more attractive option for borrowers, and a viable product for banks. While terms up to 10 years exist in Canada, the uptake on mortgage terms over five years long is rare among Canadians. This is largely due to challenges that lenders have in securitizing and funding these longer terms. This differs widely from the American mortgage marketplace, in which terms up to 30 years is common.

“The government is examining the barriers to making long-term mortgages more widely available in Canada and offering more options to borrowers looking for a mortgage,” states the FES, along with plans to launch consultations on the proposal.

Also read:

• Canada’s 2024 Fall Economic Statement: What you should know
• Ratehub.ca’s 2025 mortgage predictions
• OSFI drops stress test requirement for uninsured renewal switches
• Now in effect: 30 year amortizations for all first-time home buyers, insured mortgages up to $1.5 million
• Insured vs. uninsured mortgages: What’s the difference?
• What is a high-ratio mortgage?