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Insured mortgage? Switching just got easier.

If you paid a mortgage default insurance premium, the stress test might fall away if you want to switch lenders.

Many lenders can now use the contract rate to approve you instead of the higher stress-test rate — allowing you the chance to save more (mortgage) bucks.

Nov 19, 2023

Updated November 23, 2023

The existing OSFI guidance outlined below, which was recently highlighted and adopted by most lenders a few weeks ago, was included in the federal government's new Canadian Mortgage Charter delivered on November 21, 2023 (the charter is new, but this 'insured switch' guidance isn't).

Easing of stress test means you can look for a better deal.

Until recently, if you were hoping to get a better rate with a different lender at renewal or by breaking mid-term, you had to re-qualify again at the federal stress-test rate (5.25% or your contract rate plus 2%, whichever is higher).

Based on today's elevated market rates, you would have to clear a higher qualification hurdle which could stop the deal cold and leave you stuck with your current lender's offer.

But now, a little-known federal rule has recently been brought forward for all insured mortgages, allowing them to re-qualify using just their contract rate if they switch lenders.

There are some conditions, however, so here are the details you need to know.

Is this a new rule for insured switches?

Apparently, it was buried in the federal regulator's fine print and brought front and center a few weeks ago.

OSFI (Office of the Superintendent of Financial Institutions) is the federal government agency that regulates mortgage rules for institutional lenders (like banks and mortgage finance companies). It sets the current mortgage stress test rules to protect lenders from increased defaults should rates rise (which, of course, rise they did, and mortgage defaults are still at record lows, primarily thanks to the stress-test cushion).

Every home buyer typically gets their first mortgage approved at the stress test rate — and a vast majority of them go forward to pay their mortgages on time.

Experts and critics argue that having to get re-approved at today's higher stress test rates may automatically prevent these proven mortgagees from shopping around for better competitive rates — leaving them at the mercy of lenders who know they can't move their mortgage.

Since OSFI quietly spotlighted this rule for all insured switches (not just from 2016 and before) — many lenders, including our in-house THINK Financial, have implemented it.

"It's a real fear for homeowners looking at renewing into higher rates that they may not get the best deal with their lender. This easing of the stress test for some homeowners is not insignificant and forces banks to be more competitive on renewals."

– Dan Eisner, True North Mortgage Founder and CEO

What are the conditions for re-qualifying at the contract rate?

Here are the rules that may apply to transferring your insured mortgage to another lender:

  • An 'insured' mortgage for this rule means a default insurance premium was paid (usually as a high-ratio mortgage of less than 20% down payment, but not always).
  • If your home was purchased for less than the $1M insurable limit, but is worth more than $1M at renewal, you're still eligible, assuming other conditions are met.
  • The amortization of the insured mortgage has to be in line with the original mortgage terms (i.e. it cannot be extended or was not previously increased).
  • If your insured mortgage was refinanced, this qualification rule no longer applies.
  • A maximum of $3K in penalties and fees can be added onto the mortgage at time of switch (typically due to a break in a previous contract that incurs a pre-payment penalty, a portion of which may be added to the new mortgage).

Other criteria may apply, depending on the lender.

Can uninsured mortgages be qualified using the contract rate?

OSFI maintains the current stress test regulations will still apply when approving uninsured (conventional) mortgages — and there's no indication these rules will change in the near future.

Why are only insured mortgages included in OSFI's stress test easing?

Insured mortgages are provided by three Canadian insurers — CMHC (Canadian Mortgage and Housing Corporation, a crown entity), Canada Guaranty and Sagen (two private insurers). These mortgages are backed by government regulation, and lenders are protected in the case of default (however, a borrower is not protected and is still liable upon default).

The insurance protection lowers the risk for lenders and thus allows regulations to be eased for re-approving your mortgage.

Uninsured mortgages are secured by your property equity without the backing of default insurance, so the federal mortgage stress-test rate qualification adds an extra layer of risk management.

The mortgage stress test has homeowners concerned about their upcoming renewals — coming into the highest mortgage rates in over two decades. But there are strategies and ways to save to consider. Talk to an expert True North Mortgage broker today in your preferred language.

How can you take advantage of this new rule?

Not all lenders may abide by this rule; they're not necessarily obligated. Instead, market competition entices lenders to adopt the OSFI insure-switch rule.

Using an expert, unbiased broker, like here at True North Mortgage, is important. We know which lenders to shop for your best possible rate and insured mortgage fit — to help you save for your next term.

Easing your pressure — by helping you save the most.

Our highly trained brokers are salaried and non-commissioned to help ensure you get the best mortgage rate and most flexible options for your situation.

Armed with a volume rate discount and access to several lenders and thousands of products — you'll be surprised how quickly we can sort out your best deal and outline the impact on your mortgage savings and goals.

And we make it easy. No matter where you are in Canada, apply or connect with us online, over the phone, by email or chatbot, or drop by a store near you.

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