Good News for Those with Mortgage Renewals 

Mortgage stress test requirement lifted for renewing borrowers who change lenders

The move improves competition among the big banks to post lower interest rates for those renewing their mortgage. 

Canada’s banking regulator will no longer require banks to apply the mortgage stress test to borrowers planning to switch lenders.

The Office of the Superintendent of Financial Institutions (OSFI) confirmed with the Star that OSFI intends to inform lenders that the regulator will end its expectation of applying the stress test to mortgage holders looking to renew with another lender. The Superintendent of Financial Institutions, Peter Routledge, first confirmed the news with The Globe and Mail on Wednesday.

The minimum qualifying rate, or stress test, for uninsured mortgages is currently 5.25 per cent, or two percentage points higher than the actual mortgage rate being offered, whichever is higher. 

In a stress test, buyers must prove they’re able to afford a mortgage rate two per cent higher than the qualifying mortgage rate. Uninsured mortgages are residential mortgages with a down payment of 20 per cent or more.

OSFI’s new rule is for straight switches of uninsured mortgages at renewal — a “straight switch” means the borrower will keep the same amortization schedule (length of time it takes to pay off the mortgage) and current loan amount.

“There are two primary reasons for this change. First, we are listening to what we have heard from industry and from Canadians about the imbalance between insured and uninsured mortgagors at the time of mortgage renewal,” an OSFI spokesperson said in an email response to the Star.

“Second, when we look at the data over time, we have observed that the prudential risks that this was intended to address have not significantly materialized. As a prudential regulator we enable banks and lenders to compete and take reasonable risks.”

The move from the banking regulator is seen by mortgage brokers as a boon for the industry. 

“This is good news for any Canadian whose mortgage is renewing,” said mortgage broker Ron Butler. Switching to different lenders is still an intensive process, but removing the stress test does get rid of one “unnecessary” barrier. 

Because the stress test made it more difficult for borrowers to switch, their existing lender would often provide higher interest rates upon renewal, knowing their client was unlikely to move to a new lender, he said. 

“Now, people will call a few lenders to see what their best interest rate is and come back to their existing lender who will then match the best offer,” Butler said. “Mortgage holders won’t have to change just to get a better deal.”

Broker Ralph Fox, founder of Fox Marin Associates, believes the move increases competition among the big banks which is “good for consumers.” 

OSFI’s measure was ultimately used as extra security for banks to ensure new borrowers were able to cover their loan if interest rates rose, Fox said. Now, those facing high renewal rates need some relief. 

“The more choice people have the more incentive it gives banks to provide the best possible pricing to consumers,” he added. “We don’t have many major banks to begin with so anything that gives people better choices will only help.”