Canada’s banking regulator is easing the burden on homeowners trying to switch their lender when renewing their mortgage by dropping the need to reapply the stress test.
The Office of the Superintendent of Financial Institutions (OSFI) confirmed to Global News on Thursday that it’s ending the need for lenders to apply the minimum qualifying rate — the mortgage stress test — on straight switches of uninsured mortgages at renewal.
A straight switch sees a homeowner renew their mortgage at the end of their term with a new lender, but maintain the same amortization schedule and loan amount. Essentially, it’s the same mortgage but under a new lender.
OSFI head Peter Routledge first confirmed the move in an interview with the Globe and Mail on Wednesday.
The mortgage stress test sees lenders subject prospective homebuyers to a qualifying rate of 5.25 per cent or two percentage points above whatever contract rate is being offered on a mortgage, whichever is higher. The goal is to protect homeowners, lenders and the wider financial system should interest rates suddenly rise higher, reducing the risk that borrowers would be unable to make their payments.
Having to requalify at potentially higher rates can limit competition, however, as borrowers already don’t need to pass the stress test when renewing their terms with their existing lender.
In announcing the major shift, an OSFI spokesperson said one of the motivating factors was to align the uninsured mortgage space with insured mortgages, the latter of which is regulated by the federal government. Straight switches of insured mortgages at renewal are already not subject to the stress test.
That point was among arguments raised by the Competition Bureau in the spring as the watchdog called for OSFI to drop the stress test at renewal. At the time, Routledge told MPs that he acknowledged the “imbalance” but stood by the “sound underwriting principles behind it.”
But OSFI’s spokesperson also told Global News on Thursday that the risks the regulator was guarding against by maintaining the stress test on straight switches “have not significantly materialized,” opening the door to looser conditions.
“As a prudential regulator we enable banks and lenders to compete and take reasonable risks,” the spokesperson said.
OSFI is working with financially regulated financial institutions to prepare them for the change and intends to “formally communicate” the plans on Nov. 21.
The move comes as Ottawa also takes steps to loosen mortgage conditions. As of Dec. 15, 30-year mortgage amortizations will be available to all first-time homebuyers and purchases of new builds, while the insured mortgage price cap will rise to $1.5 million, up from $1 million previously.