Since the federal mortgage stress test rolled out in 2018, a small percentage of mortgage renewers have been trapped with their current lender, like a bad arranged marriage. Government policy effectively blocked uninsured borrowers with higher debt ratios from changing lenders to get a better deal.

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Canada's banking regulator loosens mortgage stress-test rules. Who will benefit? Back to video

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Our banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), addressed that problem on Thursday, but with stipulations. Here’s how things went down:

The previous policy

Seven years back, the feds started making uninsured mortgagors prove they could afford payments based on rates at least 200 basis points higher than the rate they actually paid. This “stress test” was key in preventing borrowing excesses and preparing borrowers for the big rate spike in 2022-’23.

But there was a nasty side effect. For some borrowers who accumulated debt — for good, bad or unavoidable reasons — the stress test meant they could no longer pass lenders’ debt-ratio tests.

As a result, these folks couldn’t qualify at other lenders, even those with a perfect payment track record and those who met all other regulatory criteria, including strong credit, provable income, ample equity, and so on.

Consumer advocates charged that lenders, with their powerful analytics, could take advantage of borrowers at renewal if they knew they couldn’t switch lenders for a better rate. For these poor souls, OSFI’s policy was tantamount to, “You’ll take whatever rate your current lender gives you, and you’ll like it.”

It all came to a head in a March 2024 report from the Competition Bureau that criticized OSFI for potentially “harming borrowers and the competitive process.”

OSFI, never one for bad publicity, relented and did the right thing. In a conference call Thursday, its assistant superintendent of regulatory response, Tolga Yalkin, admitted, “One can immediately see how it may lock some borrowers into their current lender and, in a sense, make it impossible for some of the most vulnerable homeowners to find a better deal elsewhere.”

What OSFI has done to fix it

Effective Thursday, uninsured bank borrowers no longer need to show they can afford a higher rate when switching lenders. The provisos are that the borrower must not increase the loan amount or the remaining contractual mortgage amortization.

Note that some banks aren’t allowing this flexibility on day one. It may take weeks for all banks to adapt their policies.

The problem is, this stress test exemption only applies if you’re transferring “from one federally regulated lender to another,” OSFI says.

This means if you want to move your uninsured mortgage to a bank from one of Canada’s 392 provincially regulated credit unions and caisses populaires, OSFI says you’re out of luck — unless you can pass the stress test.

(Side note: For default insured mortgages, the government clarified last year that they can be transferred to a new lender without the 200 basis point stress test.)

It also means that banks cannot accept non-stress-tested switches from mortgage finance companies (MFCs). MFCs are non-bank competitors who fund their mortgages with bank capital and underwrite to OSFI standards. For all intents and purposes, an MFC mortgage is just as safe as a bank mortgage, but apparently that’s not good enough for the regulator.

The result is that MFC and credit union renewers with hefty debt loads now have fewer escape routes than bank customers. This is actually a gift to non-bank lenders because a small segment of their borrowers are now more captive.

That said, MFCs are hopeful that OSFI will ultimately permit uninsured bank borrowers to switch to MFCs without the stress test. The regulator was not able to comment on this by press time, however.

Another limitation of OSFI’s new policy is that it doesn’t apply if you change lenders before your renewal date. This seems like a needless and arbitrary restriction on borrowers, given that banks carefully underwrite mortgage applications, regardless of when a person switches lenders.

Moreover, folks don’t take on more debt or risk merely by virtue of changing lenders. In fact, this policy blocks borrowers from getting better terms as rates fall, including those “vulnerable” borrowers that OSFI is concerned about. But in truth, a very small share of borrowers switch before renewal anyhow, given prepayment penalties.

Net impact

Currently, three out of four borrowers are uninsured, but only one in eight change lenders at renewal, according to the Competition Bureau. OSFI’s policy change will enable a larger group of mortgagors to shop around. But we’re still only talking about a single-digit share of customers bolting for greener pastures.

Knowing the flight risk from this tiny contingent, bankers I’ve talked to say they’ll get more aggressive on renewal pricing to retain borrowers in select cases.

In short, by OSFI opening the door wider to switching lenders, more consumers will win at the renewal game. That’s true whether the borrower switches for a better deal or is offered sharper renewal pricing from their existing bank.

If OSFI’s policy were slightly more flexible, however, even more consumers would win.

Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.  

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