In Canada, nearly 40% of households hold a mortgage, making it the most significant regular expense for most families. Over a decade ago, mortgage stress tests were introduced to ensure financial stability and protect lenders from credit losses. These tests required borrowers to prove they could manage higher mortgage payments than initially offered, preparing households for potential income losses or rising mortgage interest costs. Policies implemented in 2016 and 2018 made stress tests standard for federally regulated lenders, improving borrower resilience and credit quality. However, interest rate hikes starting in 2022 have sparked a reassessment of their necessity, particularly for renewal.

Effective November 21, 2024, uninsured borrowers will no longer need to pass a stress test when switching or transferring between lenders at renewal, joining the already-exempt insured mortgage holders. These changes simplify the renewal process, level the playing field, and foster greater competition among mortgage brokers, ultimately benefiting homeowners. This guide explains the implications of these updates for insured and uninsured mortgage holders, their impact on the mortgage market, and what to consider during your next renewal.

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Key Takeaways

• Stress Test Exemptions: Insured and uninsured borrowers can now switch lenders at renewal without a stress test.
• Flexibility and Savings: Homeowners can shop for better rates and save thousands without requalifying.
• Boosting Competition: Removing stress tests fosters lender competition, allowing borrowers to benefit from lenders offering better terms and pricing.

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What Is the Mortgage Stress Test?

The mortgage stress test was introduced in 2018 to ensure borrowers could handle financial shocks, such as rising interest rates. It required borrowers to qualify at the higher of the federal benchmark minimum qualifying rate (MQR) or their current mortgage rate plus 2%.

This policy mitigated default risks for years by applying to insured and uninsured mortgages. However, its application during renewals—particularly for borrowers switching lenders—drew criticism for creating unnecessary barriers. Borrowers argued that they had already passed the test during their initial approval and demonstrated their ability to make regular payments.

History and Timeline of the Mortgage Stress Test in Canada

• Pre-2016: Stress tests were applied primarily to high—and low-ratio variable-rate mortgages (VRM) or fixed-rate mortgages with terms under 5 years, ensuring borrowers could meet payments at higher interest rates.
• October 2016: Stress tests expanded to all government-backed insured mortgages, improving credit quality but with limited impact on slowing housing prices and credit growth.
• January 2018: OSFI’s Guideline B-20 extended stress tests to uninsured low-ratio mortgages, requiring federally regulated lenders to calculate debt service ratios using the higher contractual rate plus 2% or the minimum qualifying rate (MQR). This policy reduced mortgage credit growth and house price inflation.
• June 2021: The floor for MQR was standardized at 5.25% for high- and low-ratio mortgages, ensuring consistency in stress test applications.
• March 2022 Onward: Amid rising interest rates, stress tests demonstrated effectiveness by helping households manage increased mortgage payments and reducing delinquencies when inflation and interest rates surged.

Stress Test Removal for Insured Mortgages

The stress test exemption for insured mortgages has existed for several years but has only recently gained broader awareness. This exemption applies specifically to transactionally insured mortgages, such as those where borrowers made a down payment of less than 20%. Borrowers with these mortgages are not required to undergo a stress test when switching lenders at renewal. The exemption is grounded in the Insurable Housing Loan Regulations, codified in 2012, which ensure that no additional qualification is necessary as long as the loan amount and amortization period remain unchanged. However, this flexibility does not extend to portfolio-insured mortgages, as lender changes are prohibited under portfolio insurance rules, requiring borrowers in this category to requalify if switching lenders.

Why Portfolio-Insured Mortgages Must Requalify to Switch Lenders

Portfolio-insured mortgages are home loans insured by lenders rather than individual borrowers. Unlike transactionally insured mortgages, where the borrower pays for mortgage insurance because of a smaller down payment (less than 20%), portfolio-insured mortgages are bulk-insured by the lender for a group or “portfolio” of loans. Portfolio-insured mortgages are a tool lenders use to manage risk and reduce funding costs, but they come with limitations for borrowers, particularly around switching lenders.

Portfolio-insured mortgages are a type of home loan in which the lender obtains bulk insurance to mitigate risk on conventional (uninsured) mortgages—those with a down payment of 20% or more. This insurance enables lenders to securitize these loans or secure lower funding costs, making their mortgage products more competitive. Unlike transactionally insured mortgages, the lender bears the cost of portfolio insurance, and borrowers are often unaware their mortgage has been insured.

However, borrowers with portfolio-insured mortgages face restrictions when switching lenders, as the insurance is tied to the original lender’s portfolio. Mortgage qualification is required to switch lenders, ensuring the insurance remains valid. Portfolio insurance also benefits the broader market by allowing lenders to offer more competitive rates on conventional mortgages while managing risk and reducing exposure to defaults across their loan portfolios.

Why the Stress Test Isn’t Needed for Insured Mortgages

The mortgage insurer, such as CMHC, bears the credit risk for insured loans throughout the loan’s life. This eliminates the need for lenders to stress test borrowers again at renewal when switching lenders.

Stress Test Removal for Uninsured Mortgages

Starting November 21, 2024, uninsured borrowers will no longer need to pass a stress test when switching lenders at renewal. This change aligns the rules for insured and uninsured mortgages, creating a fairer and more flexible process for homeowners. Borrowers can transfer their mortgage to a new lender without stress testing, provided the loan amount and amortization schedule remain unchanged. This policy addresses long-standing disparities between insured and uninsured borrowers, enabling more homeowners to shop for better rates.

Implications and Considerations for Borrowers

Removing the stress test requirement for uninsured borrowers switching lenders brings significant opportunities for Canadian homeowners. This move by OSFI offers greater flexibility to seek better rates or favourable terms, mainly as approximately 60% of mortgages are set for renewal by 2026. With mortgages originating between 2020 and 2022 facing payment increases of about 40%, competition among mortgage brokers is expected to intensify as they strive to attract new clients and retain existing ones.

These changes bring transformative benefits to borrowers, including greater flexibility, cost savings, and a streamlined renewal process. Without the stress test, switching lenders becomes significantly more straightforward. Increased competition among lenders is expected to drive down rates, allowing homeowners to save thousands over their mortgage term. Aligning the rules fosters fair treatment and promotes a more balanced and competitive mortgage market.

To make the most of these changes, borrowers should carefully evaluate lender options by comparing rates, fees, and conditions. Understanding whether their mortgage is insured, transactionally insured, or portfolio-insured is essential for determining renewal options.

Impacts on the Mortgage Industry

Speculation continues over whether OSFI might eventually remove the mortgage stress test altogether, particularly as its relevance wanes in a falling-rate environment. Proposed loan-to-income (LTI) and debt-to-income (DTI) restrictions address household debt risks by capping 75% of mortgage customers to loans up to 450% of their income. While these measures are intended to help financial institutions manage risk, feedback has largely been critical, citing redundancy, late implementation, and disproportionate impacts on smaller lenders. This policy shift could intensify competition among mortgage brokers, prompting better terms for borrowers while increasing the demand for mortgage brokers to guide borrowers through a more complex lending environment. Ultimately, borrowers may benefit from more choice, improved rates, and a smoother renewal process.

Frequently Asked Questions (FAQ) on Removal of the Mortgage Stress Test

Final Thoughts

Removing the mortgage stress test for insured and uninsured renewals is a game-changer for Canadian homeowners. This policy shift simplifies renewal, promotes lender competition, and empowers borrowers to secure better rates and terms. The result? More savings, greater flexibility, and a smoother mortgage process.

If your mortgage renewal is approaching, now is the perfect time to explore your options. Understanding these new rules can help you make decisions to maximize your savings, regardless of whether your mortgage is insured or uninsured.

At nesto, we’re committed to helping Canadians achieve their mortgage and homeownership goals. Over the past few weeks, nesto has offered Canada’s lowest nationally advertised 5-year uninsured fixed rate, making qualifying and paying your mortgage easier. Our expert team is here to guide you through every step of the renewal process, ensuring you get the best solution for your financial needs.

Contact nesto today to start your renewal journey with confidence. Let’s make your mortgage renewal stress-free—because it should be.

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