Yet another change is in the pipeline for Canadian mortgage holders in 2024.
The Office of the Superintendent of Financial Institutions (OSFI) revealed last week to The Globe and Mail that it will eliminate the mortgage stress test for uninsured borrowers who plan to switch lenders upon renewing their loan. The borrower, however, must keep the same amortization schedule and current loan amount.
In practice, removing the test for renewing borrowers would encourage banks to offer more competitive rates to retain current customers, and make it easier for those with uninsured mortgages to change lenders. The new rules would take effect on November 21st, 2024.
“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,” said an OSFI spokesperson via email to the Toronto 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.”
What are the current stress test rules, and how are they changing?
When a homebuyer takes out a mortgage loan with a federally regulated financial institution, they must pass the stress test to prove that they can cope with higher monthly payments in the event that interest rates were to rise or their income were to be reduced.
Under current rules, the minimum qualifying rate for uninsured mortgages is the mortgage contract rate plus 2%, or 5.25%, whichever is greater. Mortgage insurance is not required on loans with a down payment of 20% or more.
When an uninsured mortgage term comes up for renewal, under current rules, the borrower would be required to pass the stress test again if they intended to trade their current lender for a new one. In cases of a “straight switch,” where the borrower’s amortization schedule and loan amount stays the same, passing the stress test is still required. When OSFI’s updated policy takes effect on November 21st, uninsured borrowers will forgo any additional stress testing when their mortgage comes up for renewal if they plan to make a straight switch.
Those with insured mortgages – mandatory with a down payment of less than 20% – are not subject to the stress test if they are making a straight switch, as their mortgage insurance already protects the new lender from potential missed payments.
This latest change to mortgage financing rules quickly follows the federal government’s recent announcement to expand eligibility for 30-year amortizations on insured mortgages to all first-time homebuyers, and increase the mortgage insurance cap to $1.5 million, which will take effect on December 15th.
