OSFI announces changes to stress test for uninsured mortgages at renewal

Is your mortgage coming up for renewal? As you might know, renewal time gives you the chance to explore different lenders and products if you feel like you need a change. However, until recently, uninsured mortgage borrowers have had to undergo what is called the stress test before they can switch lenders. The good news is the Office of the Superintendent of Financial Institutions (OSFI) has announced some new changes that are aimed to promote a more level playing field for home owners. Starting in November, home owners with an uninsured mortgage will no longer need to repeat the stress test at renewal time if they are switching to a new lender. Here’s what that means, and what you need to know!

Insured vs uninsured mortgages

First of all, what are uninsured and insured mortgages? These are the two types of mortgages that exist in Canada, and they depend on the size of the buyer’s down payment. Buyers with a down payment of less than 20 per cent require the addition of mortgage default insurance. This is a product designed to protect the lender in case of a default. This is called an insured mortgage. Therefore, uninsured mortgages have down payments above 20 per cent, meaning they do not require default insurance.                                                                                                                                                                                                                                   

What is the stress test?

The stress test is a tool lenders use to determine how much financial “stress” a home owner can take with their mortgage payments. The test calculates the buyer’s affordability if mortgage rates were either two percentage points higher than current rates, or for a rate of 5.25 per cent (whichever is higher). The goal is to ensure home owners could handle their mortgage payments if financial conditions were to change.

While the stress test theoretically protects buyers and lenders, it has created some issues for home owners at renewal time. Home owners who renew with their current lender do not need to pass the stress test again. However, those hoping to switch to a new lender with better rates were required to do so. This means that even if better rates were available, many home owners would be hesitant to make the switch due to this obstacle. This rule only applied to uninsured mortgages, while insured mortgages did not have to go through the test again.

Why does this change matter to home owners?

So, now that stress test requirements are shifting, how will it impact home owners? This change will likely be significant for home owners with uninsured mortgages. It will allow home owners to explore their options more freely at renewal time if lower rates become available. Previously, the risk of being unable to pass the stress test kept home owners locked into the same lender and product, even if there was a better fit out there. Now, home owners can find the right fit, and lenders can be more competitive with the rates they offer. 

This change is set to come into place in November, with more details to be announced soon. Hopefully, home owners will be able to enjoy a more level playing field whether they have an insured or uninsured mortgage. If you are approaching renewal time and are unsure whether your current product is the right fit, be sure to reach out to your mortgage broker! We can help you explore your options so you are ready to act at renewal time.

If you have any questions about your mortgage, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.