In a landmark decision, the Office of the Superintendent of Financial Institutions (OSFI) has removed the stress test requirement for uninsured mortgage borrowers switching lenders at renewal. Effective November 21, 2024, this change levels the playing field between insured and uninsured borrowers, fostering competition in the mortgage market and empowering homeowners to secure the best possible rates.
The mortgage stress test, introduced in 2018, aimed to ensure borrowers could withstand potential interest rate hikes. It required borrowers to qualify at a higher rate than their contract rate, known as the Minimum Qualifying Rate (MQR). While well-intentioned, the stress test created barriers for borrowers, particularly those with uninsured mortgages, seeking to switch lenders at renewal.
Uninsured Mortgage Borrowers Rejoice: A Long-Awaited Change
Previously, only insured borrowers enjoyed exemption from the stress test at renewal. This created an imbalance in the market, as uninsured borrowers faced stricter qualification criteria when switching lenders. OSFI’s decision to eliminate the stress test for uninsured borrowers making straight switches (no changes to mortgage size or amortization) is a welcome change.
Understanding Insured vs. Uninsured Mortgage:
Before we dive into the details of this exciting change, let’s clarify the difference between insured and uninsured mortgages.
- An insured mortgage is one where the borrower has made a down payment of less than 20% of the home’s purchase price. These mortgages require mortgage default insurance, which protects the lender in case the borrower defaults on their payments.
- An uninsured mortgage, on the other hand, is one where the borrower has made a down payment of 20% or more. These mortgages do not require default insurance.
Benefits for Borrowers:
- Increased Competition: Lenders will now compete more aggressively for your business, leading to more competitive rates and improved offerings.
- Greater Choice and Flexibility: Borrowers can freely explore options from various lenders without the fear of failing the stress test.
- Potential for Significant Savings: Securing a lower interest rate can result in substantial savings over the life of your mortgage.
Navigating the Mortgage Renewal Process
With the stress test hurdle removed, borrowers must manage their mortgage renewals proactively. Here are some key tips:
- Start Early: Begin exploring your options before your renewal date.
- Shop Around: Compare rates and terms from multiple lenders, including your current bank and mortgage brokers.
- Negotiate: Don’t hesitate to negotiate with lenders to secure the best possible deal.
- Consider All Factors: Evaluate not just the interest rate but also prepayment options, fees, and other features.
Key Highlights of the Stress Test Exemption
- Effective Date and Scope
Starting November 21, 2024, uninsured mortgage borrowers switching to a new lender at the end of their term are exempt from the Minimum Qualifying Rate (MQR) stress test, provided their mortgage size and amortization period remain unchanged.
Insured borrowers have been exempt from this requirement since January 2024.
- Rationale Behind the Change
OSFI acknowledged the “imbalance” in how insured and uninsured borrowers were treated at renewal. Insured borrowers, who typically put less than 20% down, were not required to undergo the stress test when switching lenders, whereas uninsured borrowers were.
The policy change reflects OSFI’s intent to enable fair competition and eliminate unnecessary barriers for uninsured borrowers.
- Impact on Borrowers
Lower qualification thresholds: Borrowers switching lenders will now qualify based on their contract rate rather than the higher MQR, which is 5.25% or 2% above the contract rate, whichever is higher.
Increased competition: The removal of the stress test at renewal incentivizes borrowers to shop around for better rates, potentially saving thousands over the life of their mortgage.
Stress Test & Mortgage Renewals: Your Frequently Asked Questions Answered
1. What is the mortgage stress test?
The mortgage stress test is a requirement for borrowers to qualify for a mortgage at a higher interest rate than their contract rate. This ensures they can handle potential interest rate increases.
2. Who is affected by this change?
Uninsured borrowers (those with a down payment of 20% or more) switching lenders at renewal are now exempt from the stress test.
3. Why did OSFI make this change?
OSFI recognized the “imbalance” between insured and uninsured borrowers at renewal. This change aims to create a more competitive mortgage market and provide greater choice for borrowers.
4. What are the benefits of switching lenders at renewal?
Switching lenders can result in lower interest rates, better terms, and potential cost savings over the life of your mortgage.
5. How can I find the best mortgage rate?
Shop around and compare rates from multiple lenders, including banks, credit unions, and mortgage brokers. Use online tools and resources to research and compare options.
6. When should I start thinking about my mortgage renewal?
Ideally, start exploring your options 3-4 months before your renewal date. This gives you ample time to research, compare, and negotiate with lenders.
7. What factors should I consider when choosing a mortgage?
Consider the interest rate, term, amortization period, prepayment options, fees, and the lender’s reputation and customer service.
8. Do I need to use a mortgage broker?
While not mandatory, a mortgage broker can provide valuable expertise and access to a wider range of lenders and mortgage products.
9. What if I want to change my mortgage terms at renewal?
If you need to change your mortgage amount or amortization period, you may still be subject to the stress test. Consult with your lender or a mortgage professional for guidance.
10. Where can I find more information about mortgage renewals?
Consult with your lender, or a mortgage broker, or refer to resources from OSFI and the Financial Consumer Agency of Canada (FCAC).
Unlock the Best Mortgage Rates at Renewal
The removal of the stress test for uninsured mortgage renewals is a significant development for Canadian homeowners. This change empowers borrowers to make informed decisions, fosters competition in the mortgage market and paves the way for potential cost savings. By actively engaging in the renewal process and exploring all available options, borrowers can secure the best possible mortgage terms and achieve their homeownership goals.
Don’t miss out on this opportunity to save! The stress test is gone for uninsured mortgage renewals. Contact Pegasus Mortgage Lending today for expert advice and the best rates.
