Homeowners won’t face mortgage stress test if renewing with new lender: OSFI

Canada’s banking regulator is easing the process for homeowners switching lenders during mortgage renewals by removing the requirement to reapply the mortgage stress test.

The Office of the Superintendent of Financial Institutions (OSFI) confirmed to Global News on Thursday that the minimum qualifying rate, or stress test, will no longer be applied to straight switches of uninsured mortgages at renewal.

A straight switch occurs when a homeowner renews their mortgage with a new lender while maintaining the same loan amount and amortization schedule. Essentially, the mortgage terms remain unchanged, except for the lender.

OSFI head Peter Routledge initially announced the decision in an interview with the Globe and Mail on Wednesday.

The mortgage stress test requires lenders to qualify borrowers at either 5.25 percent or two percentage points above the contract rate, whichever is higher. The purpose is to safeguard homeowners, lenders, and the broader financial system against potential risks from rising interest rates that could make mortgage payments unaffordable. However, requalifying at higher rates has limited competition since existing lenders don’t require homeowners to pass the stress test at renewal.

An OSFI spokesperson explained that the shift is aimed at aligning uninsured mortgages with insured ones, which are already exempt from the stress test during straight switches at renewal. This argument was raised by the Competition Bureau earlier this year, pushing for the change to enhance competitiveness.

While OSFI previously upheld the stress test as a sound underwriting measure, the regulator now says that the risks it sought to mitigate have "not significantly materialized," making way for more flexible conditions. "As a prudential regulator, we enable banks and lenders to compete and take reasonable risks," the spokesperson added.

OSFI is working with financial institutions to prepare for the change and plans to formally announce the details on November 21.

This adjustment coincides with Ottawa’s efforts to ease mortgage conditions. Starting December 15, 30-year amortizations will be available for all first-time homebuyers and new builds, and the insured mortgage price cap will increase from $1 million to $1.5 million.