Homeowners in Canada renewing their mortgages may face an unexpected hurdle depending on their mortgage type. The Office of the Superintendent of Financial Institutions (OSFI), the country's banking regulator, has acknowledged an "imbalance" in how the mortgage stress test applies during renewals.
What is the Mortgage Stress Test?
Introduced in 2018, the mortgage stress test is a mandatory requirement for all uninsured mortgages (those with a down payment of less than 20%) and applies to both new applications and renewals when switching lenders. The test forces borrowers to qualify for a mortgage at a higher interest rate than their negotiated rate, currently set at either 5.25% or 2% above their contract rate, whichever is higher. This aims to ensure homeowners can handle their mortgage payments even if interest rates rise significantly in the future.
The Renewal Imbalance
The point of contention lies in how the stress test is applied during renewals. Here's a breakdown of the situation:
- Uninsured Mortgages: Borrowers renewing their uninsured mortgages and switching lenders must pass the stress test again. This can be challenging if interest rates have risen since they took out their original mortgage, potentially limiting their borrowing options.
- Insured Mortgages: For those with insured mortgages (those with a down payment of less than 20% requiring mortgage default insurance), the story differs. These homeowners do not need to re-qualify with the stress test when renewing with their existing lender or switching to a new one. This is because the mortgage default insurance protects the lender in case of default.
Why the Imbalance?
OSFI Superintendent Peter Routledge acknowledges the perceived unfairness for those with uninsured mortgages. He argues that re-running the stress test with a new lender is necessary for proper underwriting to assess the borrower's current financial situation. However, he concedes, "If I were a homebuyer facing that, I would feel like it was an imbalance."
Will the Rules Change?
Despite acknowledging the imbalance, OSFI is not currently considering removing the stress test for uninsured mortgages at renewal. Their primary concern is the potential domino effect it could have on other lending regulations. As Routledge explains, "If you loosen one underwriting standard, you'd probably have to loosen more, and our mandate calls for us to be fairly vigilant on this."
Looking for Solutions
While the stress test remains in place for now, OSFI is exploring ways to address the perceived unfairness for borrowers with uninsured mortgages. "I think it is a legitimate challenge to say to OSFI, 'Can you do something different so that imbalance goes away?' We are thinking about it, and I do think it’s a fair critique," stated Routledge.
Impact on Homeowners
For homeowners with uninsured mortgages considering a switch in lenders at renewal, it's crucial to factor in the potential impact of the stress test. It's wise to speak with a mortgage broker or lender well in advance to assess your eligibility under the current stress test rules and explore your options for securing a competitive rate.
The Future of the Stress Test
While the immediate future of the stress test renewal process remains unclear, OSFI's acknowledgement of the imbalance suggests potential changes on the horizon. Homeowners with uninsured mortgages should stay informed about any future policy updates that could affect their renewal options.
