Today I want to share some big news that could affect many Canadian homeowners. The Office of the Superintendent of Financial Institutions, or OSFI, has just announced a significant change to mortgage stress test requirements. Let's break down what this means and why it matters.

The Big Announcement

On September 25, 2024, OSFI revealed that it will no longer require borrowers with uninsured mortgages to undergo a stress test when switching providers at renewal. This is a major shift in policy that could have far-reaching implications for the Canadian housing market.

What is the Mortgage Stress Test?

Before we dive into the changes, let's quickly recap what the mortgage stress test is:

Introduced in 2018, the stress test requires borrowers to qualify for a mortgage at a higher interest rate than their actual rate.

The qualifying rate is the higher of 5.25% or the contract rate plus 2%.

This test aims to ensure borrowers can handle their mortgage payments if interest rates rise significantly. Stress guidelines introduced in 2012, initially only for those with less than 20% down payment. In 2018 Stress test was expanded to all mortgages, insured as well as uninsured.

Under the existing rules:

Borrowers with uninsured mortgages (those with a down payment of 20% or more) must pass the stress test when switching lenders at renewal. This has often made it challenging for homeowners to shop around for better rates, potentially trapping them with their current lender.

The Change:

Now, here's what's changing:

OSFI will eliminate the stress test requirement for "straight switches" of uninsured mortgages. A straight switch means renewing with a different lender but keeping the same loan amount and amortization schedule. This change will take effect on November 21, 2024.

Why the Change?

OSFI cites two main reasons for this policy shift:

Addressing the imbalance between insured and uninsured mortgages at renewal. The uninsured mortgages are allowed to switch lenders upon renewal, whereas consumers with uninsured mortgages where they have in fact have 20% or more as their contribution towards the property had to go through the stress test on switches.

The second reason is the data showing that the risks this policy was meant to address haven't significantly materialized.

Impact on Homeowners: A Practical Example

Let's consider a practical example to illustrate the impact of this change:

Imagine a homeowner, Jane, who bought a house in 2019 with a $500,000 uninsured mortgage at 3% interest. Her monthly payments were about $2,366.

Fast forward to 2024, and Jane’s mortgage is up for renewal. Current rates have risen to 5.5%.

Under the old rules: If Jane stayed with her current lender, she wouldn't need to pass the stress test. If she wanted to switch lenders, she'd need to qualify at 7.5% (5.5% + 2%). This made it difficult for Jane to shop around, even if other lenders offered better rates.

With the new rules:

Jane can now switch lenders without the stress test, as long as she maintains her original loan amount and amortization. This gives her the freedom to find the best rate available, potentially saving thousands over her mortgage term.

Broader Implications

This change could have several effects on the Canadian mortgage market and would see increased competition among lenders. There would be more options for borrowers at renewal time. Potential for lower mortgage rates as lenders compete for business. There could be a possible increase in refinancing activity as homeowners take advantage of the new rules.

While this is a significant change, it's important to remember that the overall goal of financial stability remains. OSFI has stated they'll continue to monitor the market and make adjustments as needed.

This change represents a major shift in Canadian mortgage policy, potentially offering more flexibility and better options for many homeowners. As always, it's crucial to stay informed and consider your individual financial situation when making decisions about your mortgage.

Wish you all the very best! Reach out to our dedicated team at Elixir with any queries you have about real estate, and we will do our best to help.

Mudit Mehta 

Broker of Record

ELIXIR REAL ESTATE INC.

Off: 416-816-6001 | [email protected]