Should regulators make the change?
Canada's Competition Bureau is calling on the federal government to waive the requirement that some borrowers pass the mortgage stress test when renewing their loans. The bureau argues that this requirement limits Canadians' ability to shop around for better rates.
In a report released Thursday examining concentration in the financial sector, the competition watchdog said borrowers with uninsured mortgages should not have to requalify under the stress test rules when simply renewing their term with a new lender.
“With the current high-interest rates, some borrowers may be unable to pass the stress test even though they have good credit and would have been able to service their loan,” the report stated. “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.”
Stress test explained
The mortgage stress test, or minimum qualifying rate, requires borrowers to prove they can afford payments at either the contracted rate plus 2% or 5.25%, whichever is higher. It aims to insulate homeowners against sudden interest rate hikes.
Homeowners renewing with their existing lender do not need to pass the stress test again. However, those seeking a better rate elsewhere must re-qualify under the stress test.
The Competition Bureau argues that this limits a borrower's bargaining power at renewal. This also leaves lenders with minimal competition, potentially leading to higher rates for these 'captive borrowers.'
Insured vs. uninsured mortgages
The stress test on renewals doesn't apply to insured mortgages, which finance minister Chrystia Freeland reaffirmed in a recent committee appearance. However, the Competition Bureau noted that 73% of Canadian mortgages are uninsured.
Freeland highlighted the benefit of avoiding re-qualification at a parliamentary committee on Thursday.
“You do not need to requalify if you are an insured mortgage holder under the insured minimum qualifying rate, so you can switch lenders,” Freeland said. “That gives you more options and more opportunities.”
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According to the report, policymakers should consider dropping the stress test requirement for any "straight switch" of an uninsured mortgage to a new lender without changes to the loan amount or amortization period.
The Office of the Superintendent of Financial Institutions (OSFI) sets the minimum qualifying rate annually for federally regulated lenders, though some provinces impose their own tests.
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