OSFI changes mind on stress test for uninsured mortgages at renewal

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After rejecting a call by Canada’s Competition Bureau to treat mortgage stress testing equally at renewal, regardless of whether a borrower stays with the same financial institution or switches to a new one, the country’s top banking regulator has had a change of heart.

Quinn Watson, manager of communications and parliamentary affairs at the Office of the Superintendent of Financial Institutions, said Wednesday that the regulator plans to inform the banking industry formally in November that “straight switches” of an uninsured mortgage to a new financial institution will not require the new lender to assess the borrower using the minimum qualifying rate stress test. These switches must be on the current amortization schedule and loan amount, he said.

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The qualifying rate for an uninsured mortgage is the contract rate plus two percentage points, or 5.25 per cent, whichever is greater, and was put in place to help ensure borrowers could handle an increase in interest rates or an higher household expenses over the mortgage period.

Industry players had complained about the imbalance that required the stress test to be applied again when changing banks but not when remaining with the same financial institution at renewal time. Moreover, in 2023, the Department of Finance clarified that insured mortgages did not need to pass the stress test again if the borrower switched to a different lender at renewal time. In March, the federal Competition Bureau weighed in, saying that those with uninsured mortgages should be able to switch between federally regulated financial institutions without being subjected again to the stress test.

“When consumers renew their mortgages, their ability to switch to a competitive mortgage offer is critical to ensure they obtain the best rate and terms to serve their needs,” the Competition Bureau said in a submission to the Department of Finance, noting that the share of uninsured mortgages has been growing, climbing to 73 per cent by mid-2023.

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“This rule makes it difficult if not impossible for some homeowners to find a new lender and take advantage of cheaper interest rates. When a borrower cannot switch to another lender, the current lender faces almost no competition and can offer higher rates to these captive borrowers without fear of losing their business.”

At the time, in statements to several outlets, OSFI responded by saying it did not plan to make any changes, with regulatory officials suggesting that that new lenders should assess the risks of their new clients rather than relying on underwriting done by the previous lender.

However, Watson said OSFI has now decided to make the change but only for the so-called straight switches, a shift that is to be formally communicated to financial institutions as part of OSFI’s quarterly regulatory release pilot on Nov. 21.

“We are listening to what we have heard from industry and from Canadians about the imbalance between insured and uninsured mortgagors at the time of mortgage renewal,” Watson said in an emailed statement Wednesday after Superintendent Peter Routledge appeared to reveal the change of heart in an article published by the Globe and Mail.

Moreover, Watson said, OSFI has looked at the data and did not see any red flags when it comes to its mandate of ensuring the safety and soundness of Canada’s financial system.

“When we look at the data over time, we have observed that the prudential risks that this was intended to address have not significantly materialized,” he said. “As a prudential regulator we enable banks and lenders to compete and take reasonable risks.”

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