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Stress test removed for all renewal switches?

Not yet. Maybe never. Here's why.

The pressure is increasing for OSFI to eliminate the stress test altogether for mortgage switches at renewal. Let's take a deeper look at what's at stake.

Stuck between a rock and a hard (rate) place.

Even Canada's competition watchdog is calling for federal banking regulator OSFI to eliminate the renewal stress test for uninsured mortgage switches (insured switches already have a pass). The stress test isn't required if you renew with your lender.

Over 70% of Canadian mortgages are uninsured. That's a lot of homeowners who could be stuck between a rock and a hard place, unable to wiggle free at renewal (thanks to today's higher stress-test rate) to switch lenders for a better deal.

Removing the dreaded test for these instances would instead foster healthier competition, discourage banks from charging higher rates to captive homeowners, plus allow those homeowners to change lenders to lower their mortgage costs over the next term.

What exactly is the mortgage stress test?

Banks are required to stress test your mortgage application at a minimum rate of 5.25% OR your actual rate plus 2.0%. This qualification restriction, first introduced in 2016 by OSFI (the Office of the Superintendent of Financial Institutions), adds an 'affordability buffer' to ensure you can handle payments if rates go up or your income is reduced.

Because rates have likely reached their peak, you're now stress-tested at rates we may not see (rates are expected to drop in the next months). For example, if your mortgage rate offer is 5.25%, your stress test rate is 7.25%.

Some homeowners who were originally tested for today's rates may not pass the higher stress test to re-qualify with a different lender at renewal.

The pressure to drop it. The pressure to keep it.

A recent competition watchdog report advocates dropping the renewal stress test.

"Consumer choice and the ability to switch [mortgage] providers lie at the heart of the competitive process. Unleashing consumers’ ability to switch financial service providers will help foster competition in the sector."
Strengthening Competition in the Financial Sector, Competition Bureau Canada, March 21, 2024

The bureau argues that with the economic decline facing Canadians (due to the Bank of Canada's rapid rate-tightening cycle), struggling homeowners should be able to switch to save some money when already facing much higher mortgage payments at renewal.

And, it cites Bank of Canada (BoC) research from 2020 that finds "Borrowers who renew their mortgage with their incumbent bank on average pay interest rates 6.1 bps higher than new borrowers, and borrowers who switch banks at renewal on average pay 10.2 bps lower than those who stay." (There are 100 basis points in a percentage point.)

According to the watchdog's ever-watchful eye, putting consumers first for the right of competitive choice prioritizes a healthier consumer environment, and OSFI should consider it when setting stringent, unmoving standards that can undermine the nature of a capitalism-based economy.

If you can't leave, you'll be charged more.

The homeowners who can't leave their bank because of the stress test will be charged even higher rates — and they're the ones who can least afford it.

What the above BoC research doesn't capture is that the average rate savings of 0.10% when switching doesn't fully illustrate how much more the 'lack of competition' can cost a captive homeowner.

For example, for a $500K uninsured mortgage (25-year amortization), if a homeowner can't switch (the bank doesn't need to compete for their renewal business), they may be charged a rate that's as much as 0.20% higher (or more), costing them thousands over their term:

  • Switching lenders and paying a 5-year fixed rate of 5.0% – Monthly mortgage payment is $2,908
  • Not switching and being charged a 5-year fixed rate of 5.2% – Monthly mortgage payment is $2,965 ($57 extra per month, but an overall savings loss of about $4,800 over the term)

The point is that switching lenders can save homeowners more cash, and not being able to switch removes the ability to reduce mortgage payments — especially for those who may really need the budget room.

"OSFI has resisted pressure to remove the stress test for uninsured mortgage switches precisely because banks are more profitable if borrowers can't leave and have to pay higher rates.

More profit reduces risk in the banking sector. I don't see OSFI doing away with this rule, though I'd be thrilled on behalf of our clients if they did."

– Dan Eisner, True North Mortgage Founder and CEO, March 22, 2024

Will OSFI bend to the 'uninsured renewal' pressure? Doubtful.

Especially because OSFI has already responded to the competition watchdog plea with a hard 'no.'

The pressure on OSFI to remove the stress test for all mortgage renewals isn't new.

Ever since mortgage rates skyrocketed to current heights, many have argued sans report (including here at True North) that if borrowers originally qualified under the stress-test rate, they shouldn't have to do so again.

Plus, OSFI is always getting flack about "going too far" — as evidenced in this CMT Mortgage Trends article from 2017.

Yet, many have agreed with OSFI (after the fact) that the stress test did prepare homeowners to better handle today's rates (the highest interest rates since the 90s). Mortgage arrears, though recently on the increase as high rates drone on, have hovered near record lows up to this point.

Here's why OSFI isn't likely to (ever) budge on this one.

This government body isn't about borrower's rights. It exists solely to protect Canada's banking infrastructure and rarely yields to political pressure.

Banks are making more money with the uninsured-switch rule, which helps to protect them against the higher risk of uninsured mortgages (which are not government-protected like insured mortgages and, therefore, exposed to the risk of default).

Despite more hardship for homeowners, relaxing the stress test for uninsured mortgage renewals takes away this profitability cushion, and OSFI isn't likely to even consider making a change.

At True North, we'd be thrilled if OSFI turned around to remove this rule.

Homeowners will have to look to their own devices (and get great advice and their best rate) to try to increase their home affordability numbers at renewal. And wait until interest rates finally start dropping (how long is the real question).

Didn't OSFI already bend by allowing insured mortgages to escape the renewal stress test?

Short answer? No.

Here's the longer answer. In October 2023, the Canadian Government Finance Minister brought forward a new Mortgage Charter outlining guidance for homeowners (a general compilation and rehashing of rules that already existed).

In it, it stated that insured mortgages didn't have to re-qualify through the federal stress test to switch lenders at renewal. Some people thought, wow, OSFI relented. Except they didn't.

Apparently, this long-standing' OSFI rule was living in the OSFI fine print, and the regulator re-highlighted it in the fall of 2023 (lenders were unaware and scrambled to make the adjustments to their mortgage approval process).

Fact: OSFI added uninsured mortgages to the stress test requirement mix in October 2017, which came into full effect in January 2018. Up till then, only insured mortgages were required to stress test.

Want help breaking free?

Your best rate can help lower your stress test rate with a lender, which may help you qualify to switch to a better deal at renewal.

Or, our expert brokers may be able to identify one of many strategies to find some budget room or save cash.

You're not alone. We're here with free, unbiased mortgage advice and some olive oil (aka our volume rate discount) to help get you out of a tight renewal squeeze.

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