By Alisa Aragon-Lloyd, as seen in "New Home + Condo Guide" magazine, November 4, 2024
As of Nov. 21, the landscape for homeowners is going to change in a good way — at least when it comes to how, and with whom, you renew your mortgage.
The Office of the Superintendent of Financial Institutions (OSFI), which regulates banks and non-bank lenders (mono-lenders that only work with mortgage experts), will no longer require lenders to use the mortgage stress test for borrowers who switch or transfer their mortgage to a new lender during renewal time. Quick translation? Renewing your mortgage will get easier.
HOW IT IS NOW Currently, the rules require a borrower with an uninsured mortgage (where a homeowner has more than 20 per cent equity in their home) who wants to change lenders at renewal time, to pass the federal mortgage stress test to show they can handle payments at an interest rate two per cent higher than the actual contract rate.
The mortgage stress test is in place so borrowers applying for a new mortgage can prove they can afford to still make their payments in the event that interest rates increase. A borrower must have the income and debt ratios to pass either the minimum qualifying amount, which currently is 5.25 per cent, or their contract rate plus two per cent – whichever is higher. For example, if the contract rate is 4.39 per cent for a three-year fixed term, the borrower would need to qualify at 6.39 per cent.
Both fixed and variable mortgage rates have been in the five-to-six-per cent range in recent years, and so all mortgages have been stress-tested at plus two per cent. This has meant many borrowers had to pass a stress test of between seven and eight per cent, making it much tougher to qualify if they wanted to switch lenders at renewal.
HOW IT WILL BE AFTER NOV. 21 With the change, a homeowner will have more flexibility to shop the best rates and make the move over to a new lender that works best for them, as long as it’s a “straight transfer/ switch” — the mortgage amount and amortization period remains the same.
The change will also address the “imbalance” that Canada’s banking regulator felt was occurring between how insured and uninsured borrowers were treated at renewal time. As well, professionals in the mortgage industry pointed out that requiring the stress test effectively removed competition from the mortgage marketplace, as a borrower would be less likely to shop around for better options at renewal, and that lenders would be less incentivized to offer better rates for those who did want to switch. A homeowner who renews their mortgage with their existing lender is not usually re-stress tested.
A WIN-WIN SITUATION This change will improve competition in the mortgage marketplace and will allow borrowers the opportunity to shop around for the best rate, which in some cases can save a homeowner hundreds of thousands of dollars over the lifetime of their mortgage. Plus, their renewed ability to do so will motivate lenders to offer more competitive rates to entice new clients who may be thinking of switching. If your mortgage is up for renewal soon, now’s the time to check with a mortgage expert, so you can be informed of all your available options.
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