Major Shift in Mortgage Rules: OSFI to Eliminate Stress Test for Uninsured Mortgage Switches
In a significant move that could reshape the Canadian mortgage landscape, the Office of the Superintendent of Financial Institutions (OSFI) has announced it will eliminate the stress test requirement for straight switches of uninsured mortgages starting November 21, 2024. This policy change is poised to make mortgage renewals smoother and more accessible for many homeowners, potentially easing the financial strain for borrowers across the country.
Understanding the Change: Since January 2018, the stress test under OSFI’s B-20 Guideline required borrowers with uninsured mortgages—those with a down payment of 20% or more—to qualify at the higher of the Bank of Canada’s five-year benchmark rate or their mortgage rate plus 2%. This was designed to ensure borrowers could withstand potential future rate increases.
However, starting November 21, 2024, this requirement will no longer apply to straight switches, where borrowers move to a new lender but maintain the same loan amount and amortization schedule. This adjustment is expected to simplify the process for homeowners looking to switch lenders at renewal without proving they can afford their mortgage at a higher rate.
Why the Change? This policy shift marks a reversal from OSFI’s earlier stance, which as recently as June upheld the stress test for uninsured mortgage switches. The change follows feedback from the industry and Canadian borrowers about the imbalance between insured and uninsured mortgagors at the time of mortgage renewal. Additionally, OSFI’s data indicated that the prudential risks initially targeted by the stress test had not significantly materialized, prompting a reevaluation of the policy.
Impact on Borrowers: For borrowers with uninsured mortgages approaching renewal, this change removes a significant hurdle, allowing them to shop around for better rates without the risk of disqualification. This adjustment is expected to increase competition among lenders, providing more options and potentially better conditions for borrowers.
Ron Butler of Butler Mortgage highlights the practical benefits of this change, noting that "it never made sense to apply a stress test on a renewal," especially when the current lender does not typically recheck employment status at that time. New lenders fully underwrite switch mortgages, rendering the stress test redundant.
Industry Reaction: The mortgage industry has largely welcomed the change. Lauren van den Berg, CEO & President of Mortgage Professionals Canada, described it as a "significant win for Canadians," emphasizing that it will "ensure homeowners can secure the best rate that fits their financial needs without unnecessary barriers." This move is celebrated as a step towards a more balanced and competitive market, encouraging healthy competition among lenders and leading to better options for borrowers.
OSFI's decision to eliminate the stress test for uninsured mortgage switches reflects a responsive and adaptive regulatory approach, aimed at fostering a fairer and more dynamic mortgage market. As this change takes effect, it will be crucial for borrowers and industry professionals to stay informed and prepared to navigate the new landscape. For those considering a mortgage switch or renewal, now may be an opportune time to explore options that could better suit their financial needs in a potentially more borrower-friendly environment.
If you're approaching a mortgage renewal or considering switching lenders, connect with Vidit Paruthi - Mortgage Professional to discuss how these changes could benefit your specific situation. Our expertise and personalized approach can help you make the most of the new regulations, ensuring you find the best possible mortgage solution tailored to your needs.