Stress test on mortgage renewals ends today: What you need to know?

Starting today, some mortgage borrowers will have an easier time switching lenders thanks to the elimination of the stress test’s higher rate qualification requirement.

OSFI, Canada’s banking regulator, announced in September that it would eliminate the minimum qualifying rate (MQR) requirement for direct swaps of uninsured mortgages effective November 21, 2024.

A direct swap is a transfer of a mortgage from one lender to another without increasing the loan amount. An uninsured mortgage is a mortgage that does not have insurance against mortgage default. It typically applies to loans with a down payment of 20% or more.

Under current requirements, borrowers looking to switch lenders had to prove they could afford the payments based on a requalification at an interest rate two percentage points above their contract rate. This limited their options and reduced their bargaining power, especially if their financial situation worsened.

The move by OSFI is seen as a win for mortgage borrowers, offering greater flexibility to switch lenders in search of better rates or more favorable terms. It also comes at a critical time for Canadian homeowners, as about 70% of all outstanding mortgages are expected to be up for renewal by the end of 2026.

With mortgages originated between 2020 and 2022 set to see payments rise by about 40%, competition is expected to intensify as lenders compete for new business and work to retain their existing customers.

Removing the stress test requirement for uninsured borrowers looking to switch lenders opens up new options for homeowners. It makes getting the best rate at renewal more possible and is entirely consistent with principles of fairness to borrowers.

Some borrowers were literally forced to stay with their current lender at renewal to avoid any requalification checks like proof of employment, while those looking to switch loans had to go through the full underwriting process. There had been speculation that this change was just one step toward the permanent abolition of the mortgage stress test, especially given its diminishing relevance in today’s falling rate environment. John Webster, former CEO of the Scotia Mortgage Authority, predicts that the stress test will be abolished entirely within the next 12 months.