Cherry blossom trees line a residential street in Vancouver, on April 4, 2023. Mortgage rule changes by the OSFI will make it easier for borrowers with uninsured mortgages to move to a different bank at renewal and are expected to motivate banks to offer cheaper mortgage rates.DARRYL DYCK/The Canadian Press
Canada’s banking regulator is set to relax mortgage rules for homeowners who switch banks when they renew their loans.
The Office of the Superintendent of Financial Institutions (OSFI) will no longer require banks to apply the mortgage stress test on borrowers who switch lenders if they are simply renewing their loan, the regulator told The Globe and Mail on Wednesday.
The change will make it easier for borrowers with uninsured mortgages to move to a different bank at renewal. It is also expected to motivate banks to offer cheaper mortgage rates in order to retain their current borrowers and attract new customers. The move is set to go into effect Nov. 21, according to OSFI, and will be in place as the federal government relaxes other mortgage policies.
It marks a significant win for the mortgage industry, which had been pushing for this relief in the face of higher rising interest rates. Combined with the Bank of Canada’s interest-rate cuts, the policy changes are expected to kick-start the slow real estate market.
When borrowers take out their initial mortgage, they must pass the federal mortgage stress test or prove that they have enough income to cover their mortgage payments at an interest rate that is two-percentage-points higher than their actual loan contract.
When the mortgage term ends and they have to renew their loan, borrowers must again pass the mortgage stress test if they want to switch to a different lender because the borrower is new to that lender. That rule stands even if the renewal is a “straight switch,” which means the borrower remains on the same amortization schedule and is not lengthening the time they will take to pay off their mortgage or increasing the amount of their loan.
But because mortgage rates more than doubled over the past two years to above 6 per cent at their height, borrowers had to prove that they could make their loan payments with an interest rate of at least 8 per cent. That made it much more difficult for uninsured borrowers to pass the stress test if they renewed with a different lender.
“There isn’t reckless underwriting in straight switches,” OSFI Superintendent Peter Routledge said in an interview.
Currently, homeowners with insured mortgages are exempt from the mortgage stress test on straight switches because the insurer is protecting the bank if the homeowner misses mortgage payments. (A borrower must pay for mortgage insurance if they have made a down payment that is less than 20 per cent of the property’s purchase price.) But until now, borrowers with uninsured mortgages have still had to requalify if they switched lenders.
The difference in rules between insured and uninsured borrowers is one of the reasons that OSFI decided to make 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,” Mr. Routledge said.
“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 mortgagor at renewal for a straight switch the same as an insured,” he said.
OSFI’s decision to eliminate the stress test on straight switches is occurring as the federal government relaxes other mortgage policies. Buyers will soon be allowed to put down smaller down payments on homes worth more than $1-million, and first-time homebuyers will be allowed to stretch out their mortgage payments over 30 years instead of 25 on an insured mortgage.
Mr. Routledge said he does not think that OSFI’s latest change will have any effect on the mortgage-market credit risk or the housing market. He said the regulator has data showing that homeowners overwhelmingly stay with their lender when they renew their mortgages, which was also the case before the mortgage stress test went into effect in 2018 for uninsured mortgages.
“I don’t view this as having discernible effect one way or the other,” he said.
The mortgage industry has been lobbying for this change and said it would be a significant win for Canadians.
“If this change is implemented it ensures that homeowners can secure the best rate that fits their financial needs without unnecessary barriers, giving them greater choice and flexibility,” said Lauren van den Berg, chief executive and president of Mortgage Professionals Canada, which represents 15,000 mortgage experts across the country including brokers, agents, lenders and insurers.
“It also encourages healthy competition among lenders, leading to better options for borrowers,” she said in an e-mailed statement.
Keisha Johnson, a mortgage broker with RTS Mortgage Financial in the Toronto region, agreed and said the change would make it easier for borrowers to shop around for better rates or terms without the worry of failing to qualify, which would give them more negotiating power.
The stress test has two thresholds: a minimum qualifying rate, or MQR, that is set by the regulator, and an interest rate that is two-percentage-points higher than the borrower’s mortgage contract. The lender must use the higher interest rate to stress test the borrower.