Superintendent Peter Routledge has revealed that the Office of the Superintendent of Financial Institutions (OSFI) will officially announce a significant regulatory change on November 21, 2024, coinciding with the quarterly pilot report. This adjustment will take immediate effect on that same day.
This new regulation aims to simplify the process for borrowers wishing to switch lenders at the time of renewal, eliminating the need to demonstrate their ability to repay their mortgage at a potentially higher interest rate.
The stress test, which was put in place in January 2018 under OSFI’s B-20 Guideline, required borrowers with uninsured mortgages—those who made a down payment of 20% or more—to qualify based on either the Bank of Canada’s five-year benchmark rate or their mortgage rate plus an additional 2%. The intention was to prepare borrowers for possible future interest rate increases.
The forthcoming change specifically addresses scenarios in which borrowers are simply transitioning their existing uninsured mortgages to a new lender without altering the loan amount or amortization plan.
Reasons for the Change
This regulatory revision marks a departure from OSFI’s earlier stance. Just a few months ago, in June, the regulator reaffirmed its commitment to keeping the stress test in place for uninsured mortgage transitions, asserting the necessity of sound risk management.
However, OSFI explained to Canadian Mortgage Trends that two central factors contributed to this policy reversal.
“Firstly, we are responding to the concerns expressed by industry stakeholders and Canadians regarding the inequity faced by insured versus uninsured mortgage holders during the renewal process,” a representative stated.
“Secondly, a review of historical data indicates that the prudential risks this policy aimed to mitigate have not materialized as initially expected,” they continued. “As a regulatory body, we encourage competition among banks and lenders, allowing for sensible risk-taking.”
The Competition Bureau has also raised issues around the fairness of the stress test. In March, they recommended that uninsured mortgage borrowers be allowed to switch lenders without undergoing the stress test, emphasizing that the policy was inconsistently applied among borrowers.
This regulatory change empowers homeowners to secure the best rates available in line with their financial situations, thereby offering them increased options and flexibility.
Scott Westlake, a notable figure in the mortgage industry, commented on this development, stating, “This change is fundamentally about creating an equal playing field for all mortgage holders. The rationale behind the stress test certainly had its merits during the initial qualification phase, but it became less relevant at the point of renewal. Lenders typically do not verify employment status during renewal, and this new rule improves the chances for Canadian mortgage holders to qualify for better rates, allowing them to avoid being locked into less favorable terms with their current lenders.”
OSFI is currently working alongside federally regulated financial institutions (FRFIs) to ensure a smooth implementation of this new rule, which is anticipated to stimulate competition among lenders while broadening the array of choices for borrowers with uninsured mortgages.
Implications for Borrowers
For borrowers with uninsured mortgages coming up for renewal, this regulatory update removes a significant barrier.
Without the pressure of the stress test, borrowers can freely search for more favorable interest rates without the risk of disqualification. This could significantly reduce financial strain, particularly in a climate of rising rates.
The shift in policy is seen as a move toward equity, granting Canadian mortgage holders a fairer opportunity during the underwriting process to qualify for better terms instead of being compelled to renew with their current lender while facing the burdensome stress test. This change could potentially lead to a more balanced and competitive mortgage market, benefitting borrowers across the country.
Overall, this development reflects a growing recognition of the need for fairness in the mortgage industry, illustrating a commitment to supporting consumers in navigating their financial options more effectively.