The Unexpected Reversal of Mortgage Renewal Stress Tests: An Analysis

It’s deplorable.

The situation became clearer in mid-October. “Clarify” isn’t quite the right word. We should rather speak of a “turnaround” as spectacular as it was unexpected.

Because the rules could not be said to be equivocal, they were applied uniformly by the entire industry.

I touched on the subject briefly in a column published last week. I said there that the Office of the Superintendent of Financial Institutions (OSFI) had caused a shockwave by stating that the stress test should not apply to the renewal of an insured mortgage. Lenders had previously understood the opposite, qualifying all their customers with an interest rate 2% above the contract rate.

This is far from trivial. What does it mean? A borrower must not exceed certain debt ratios. By assessing the weight of the debt in relation to its client’s income, the financial institution had to add 2% to the agreed rate. Concretely, this means that it measures its repayment capacity with an interest rate of 8% rather than 6%. If we go to 6%, it is far from certain that this will be the case at 8%.

How can you be eligible for the first time and no longer meet the ratios upon renewal? The explosion in rates alone can complicate the lives of borrowers. Otherwise, a drop in income or the purchase of a new car on credit may disqualify it.

The qualification rate is theoretical, it costs nothing in itself. However, someone who no longer meets the requirements at renewal will be turned down everywhere except by their current lender. Without saying that the latter will take advantage of the situation, we assume that he will not make an aggressive offer to someone he knows is attached. Competition: zero! According to mortgage brokers I’ve spoken to, this inability to shop around can result in an interest rate 0.5% higher, sometimes more.

What does that represent in dollars? Consider a $350,000 mortgage amortized over 20 years with a fixed rate of 5%. At the end of the 5-year term, the debtor will have paid $79,800 in interest and repaid a little more than $58,000 in capital. With a rate of 5.5%, the interest bill rises to $88,000 over the same period, while the principal repaid decreases to around $55,600. The cost to the customer therefore amounts to more than $8,000 in five years.

The bill may be even higher, knowing that the borrower also had no say in the authorized advance payments or in the conditions of a possible mortgage penalty for early repayment.

Test not necessary

So OSFI announced in mid-October, out of nowhere, that the renewal stress test was not necessary for insured mortgages because they carried less risk. Ultimately, the same thing could be said of a brand new insured mortgage taken out by a first-time home buyer.

It is strange that OSFI is providing this clarification at this time, people there could not ignore the widespread practice underway in the market, especially since lenders keep asking for relaxations in the application of the stress test.

Odd timing, but maybe not that much. This new position appears at a time when the government is seeking by all means to alleviate the financial burden of Canadians weighed down by inflation, at least in appearance. In particular, Minister François-Philippe Champagne lectured the food chains. I seem to have heard Chrystia Freeland give the same kind of sermons to the banks, calling on them to be accommodating to these poor individuals whose mortgage contracts were coming to an end.

The coincidence is striking.

Also, this reversal occurs at a time when a wave of most problematic mortgage renewals is on the horizon. Holders of a fixed rate loan who are nearing the end of the term will experience an increase of just over 2%. In 2026, the shock will be almost double, and on larger amounts borrowed.

Injustice?

Should we rejoice or cry injustice? Both. It’s unfair for those who have just signed a contract under disadvantageous conditions, but it will surely help others who renew their mortgage in the months to come.

Virtual lenders were quick to adjust after OSFI’s exit. A few days later, Manulife Bank announced that it was renewing loans for new clients at the contractual rate, without applying the stress test (+2%). Others followed, including First National and MCAP.

So, for the moment, you have to use mortgage brokers, the only gateway to these lesser-known lenders.

At Desjardins, we are still waiting for details. Although the Quebec institution reports to the Autorité des marchés financiers, it aligns with OSFI rules. The National Bank is also sticking to the status quo for the moment.

The peak season for mortgage renewals coincides with spring. Until then, everyone should come to terms with OSFI’s new positions, unless it causes another surprise.

If you would like to respond to this column, write to us at [email protected]. Some responses may be published in our Opinions section. If you want to contact our columnist directly, you can do so at [email protected].