Canada’s competition watchdog is urging Ottawa to drop requirements for some borrowers to pass the mortgage stress test at renewal, arguing it limits Canadians’ abilities to shop around for a better rate.
The Competition Bureau issued a report Thursday afternoon examining concentration in Canada’s financial sector and how a lack of competition impacts affordability for customers interacting with their banks.
Among the recommendations from the watchdog was waiving the need to pass the mortgage stress test again when a borrower with an uninsured mortgage renews their term.
The stress test, also known as the minimum qualifying rate, seeks to insulate homeowners against sudden increases in interest rates from the Bank of Canada. The stress test requires borrowers to qualify for a mortgage at a rate of 5.25 per cent or two per cent above the contract rate, whichever is higher, in order to prove they could handle higher monthly payments if the central bank rate rose rapidly.
Passing the stress test usually limits the size of a mortgage a borrower can qualify for and determines whether a lender will offer a homeowner a mortgage in the first place.
When a homeowner is renewing their mortgage, they do not need to pass the stress test again as long as they re-up with their existing lender. But if they want to shop around for a better rate, they’ll have to go through the process from scratch, including passing the minimum qualifying rate.
This has major implications for the rate that a consumer can negotiate at renewal, the Competition Bureau explains.
“With the current high interest rates, some borrowers may be unable to pass the stress test even though they have good credit and would have been able to service their loan,” the report said.
“When a borrower cannot switch to another lender, the current lender faces almost no competition and can offer higher rates to these captive borrowers without fear of losing their business.”
The minimum qualifying rate only applies at renewal on uninsured mortgages. Insured mortgages are not subject to the stress test when it comes time to renew, something the federal government affirmed in its Canadian Mortgage Charter unveiled last fall.
Finance Minister and Deputy Prime Minister Chrystia Freeland spoke about the benefits of not having to requalify at the higher bar in an appearance at the parliamentary finance committee on Thursday.
“You do not need to requalify if you are an insured mortgage holder under the insured minimum qualifying rate, so you can switch lenders. That gives you more options and more opportunities,” Freeland said in comments about the mortgage charter.
But the Competition Bureau noted that most homeowners are not benefiting from these policies, as the majority of mortgages (73 per cent) were not insured as of the second quarter of 2023.
The report said policymakers should consider dropping expectations for lenders to reapply the stress test in cases of a “straight switch,” where a mortgage is transferred to a new financial institution without any change in the loan amount or amortization.
Given the degree to which Canada’s mortgage market is already heavily concentrated among the Big Six banks, Ottawa should be facilitating, not discouraging, efforts by borrowers to switch their lenders, the watchdog said.
The minimum qualifying rate applies to loans from federally regulated financial institutions, though some provincially regulated lenders impose their own stress tests. The stress test on insured mortgages is set by the federal government, which matches the rate for uninsured mortgages imposed by the Office of the Superintendent of Financial Institutions.
OSFI maintained the minimum qualifying rate at its current levels in December and reviews the stress test annually.