Removal of the Stress Test for Uninsured Mortgage Renewals

OSFI, Canada’s banking regulator, announced in September that it would remove the Minimum Qualifying Rate (MQR) requirement for straight switches of uninsured mortgages effective November 21, 2024.

WHAT’S A STRAIGHT SWITCH? A straight switch refers to transferring a mortgage from one lender to another without increasing the loan amount.
WHAT’S AN UNINSURED MORTGAGE? An uninsured mortgage is a home loan that doesn’t have mortgage default insurance. This typically applies to loans with a down payment of 20% or more.

Under the current requirements, borrowers wanting to switch federally regulated lenders had to prove they could afford payments based on a requalification at an interest rate two percentage points above their contract rate. This limited their options and reduced their negotiating power, especially if their financial situation had deteriorated.

The move by OSFI is seen as a win for mortgage borrowers, offering more flexibility to switch lenders in search of better rates or more favourable terms. It also comes at a critical time for Canadian homeowners, with roughly 70% of all outstanding mortgages expected to come up for renewal by the end of 2026.

With mortgages originated between 2020 and 2022 facing payment increases of about 40%, competition is expected to intensify as lenders vie for new business and work to retain their existing clients.

OSFI previously told Canadian Mortgage Trends that the change was driven by industry feedback over the imbalance between insured and uninsured mortgagors at renewal—since insured borrowers don’t have to re-qualify at the stress test when switching—and the fact that expected risks had not materialized.

On Thursday, OSFI’s Assistant Superintendent Tolga Yalkin confirmed the regulatory change, saying, “We will no longer be expecting the application of our MQR where a borrower is switching from one federally regulated lender to another, so long as the amortization period and the loan amount are not increased.”

However, Yalkin emphasized that lenders are still required to apply a stress test to assess debt serviceability, including Gross Debt Service (GDS) and Total Debt Service (TDS) ratios.

“It just means that it’ll be up to them, based on general principles of sound mortgage underwriting, including in our Guideline B-20, to determine what stress test is appropriate,” he said.

What this means for borrowers

The removal of the stress test requirement for uninsured borrowers looking to switch lenders opens up new opportunities for homeowners.

“This makes getting a better rate at renewal more possible,” Ron Butler of Butler Mortgage told CMT. “This is all about fairness to borrowers.”

Butler pointed out the inconsistency in the old system, where borrowers who stayed with their existing lender at renewal weren’t required to undergo any requalification checks—such as verifying employment—while those looking to switch had to go through the full underwriting process.

Mortgage Professionals Canada President and CEO Lauren van den Berg had told CMT that the change “ensures that homeowners can secure the best rate that fits their financial needs without unnecessary barriers, giving them greater choice and flexibility.”

What this means for lenders

Heading into a busy mortgage renewal period, the removal of the stress test on straight uninsured switches means lenders will need to work harder to retain existing clients who may be enticed by competitors.

“I think the lenders who have got meaningful portfolios to potentially lose are going to be quite astute about what they need to do to try and retain that business.”

Devon Ajram, Vice-President and National Director of TD’s Broker Services

Devon Ajram, Vice-President and National Director of TD’s Broker Services, acknowledged that the change is a “massive win” for consumers. However, he also doesn’t believe there will be significant outflows of clients from one lender to another as lenders work hard to keep those clients.

“I think the lenders who have got meaningful portfolios to potentially lose are going to be quite astute about what they need to do to try and retain that business,” he said during the lender panel at Mortgage Professionals Canada’s National Mortgage conference in Montreal.

He added that roughly three quarters of outstanding loans are comprised of conventional, or uninsured, mortgages, and that those mortgage holders are typically less prone to financial stress and therefore less likely to make the leap to another lender.

“But I certainly do think that lenders will have to think about sharpening their pencil a little bit, certainly when it comes to renewals,” he acknowledged, particularly monoline lenders who don’t have deeper relationships with clients by way of multiple products. “Because consumers will have that option to move around if they want to.”

Manulife President and CEO Katy Boshart agreed, saying lenders will also have to up their game when it comes to customer service if they hope to retain those clients who now have more freedom to shop around.

“I think it puts the onus on us as lenders to create the right experiences for our customers,” she said. “It’s not always about [the best] rate.”

Tracy Gomes, Senior VP, Real Estate Secured Lending at Scotiabank, added that the move is “great for the client to not feel like they’re being trapped at their own institution,” and are now able to more freely shop around.

She confirmed that no further details had been provided by OSFI as of late October, and that lenders would be looking to OSFI’s Nov. 21 quarterly update for further details.

First National CEO Jason Ellis suggested that media claims of borrowers being trapped at their existing lender due to the stress test were “wildly overstated.”

“Optically, it’s good that the borrowers now have that flexibility, but I don’t think it changes a lot,” he said. However, he did add that “we are going to throw ourselves on swords to keep our borrowers.“

Is OSFI likely to scrap the stress test entirely?

There has been speculation that this change is just one step towards the eventual removal of the mortgage stress test altogether, especially given its diminishing relevance in today’s falling-rate environment.

John Webster, former CEO of Scotia Mortgage Authority, predicts that the stress test will be eliminated entirely within the next 12 months.

He points out that with OSFI’s new loan-to-income (LTI) limits for highly indebted borrowers coming into effect in Q1 2025, the two measures will likely run concurrently for about a year before the stress test is phased out.

“There’s no rationale for the stress test in this interest rate environment,” he said during a recent public appearance. “Modeling that was done by the previous superintendent was based on a rising interest rate environment, not this environment. So I don’t think there’s any rationale for it.“

If this were to happen, it would mirror what occurred in the UK, where the introduction of an LTI cap was followed by the eventual removal of their mortgage stress test.

However, not everyone in the industry shares the same optimism. Mortgage expert Ron Butler of Butler Mortgage told CMT, “Maybe, but I’ll believe it when I see it.”

Reference: https://www.canadianmortgagetrends.com/2024/11/stress-test-removal-on-mortgage-switches-what-you-need-to-know/