Superintendent Routledge mulls changes amid mortgage renewal fairness concerns
Canada's mortgage regulator admitted there's an uneven playing field for some homeowners renewing their mortgages.
Peter Routledge, Superintendent of Financial Institutions, spoke to Parliament about the issue on Tuesday, where he addressed concerns raised by the Competition Bureau in March regarding the application of the stress test at mortgage renewal time.
In March, the Competition Bureau recommended that OSFI drop the stress test for Canadians renewing their mortgages, arguing that this would make it easier for homeowners to shop for better rates and increase competition among lenders.
Routledge acknowledged this issue, stating, “If I were a homebuyer facing that, I would feel like it was an imbalance.”
He elaborated that from OSFI’s standpoint, reapplying the stress test during lender switches ensures that homeowners remain credit-worthy for their new lenders, maintaining the principle of rigorous underwriting when issuing new credit.
For insured mortgages, the need for re-underwriting at renewal is less critical because the mortgage insurer still bears the risk, not the new lender.
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OSFI is responsible for the stress test, which requires borrowers to qualify for their loans at 5.25% or two percentage points above their contract rate, whichever is higher. This rule applies to uninsured mortgages, those not backed by mortgage insurance, and aims to ensure borrowers can handle potential increases in their monthly payments due to rising interest rates.
The purpose of the stress test is to protect lenders and maintain stability in the housing market by limiting the size of the mortgage and the value of the home a borrower can afford.
However, the stress test's application varies depending on whether homeowners renew their mortgage with their current lender or switch to a new one.
Homeowners renewing with their existing lender are not required to re-pass the stress test, regardless of whether their mortgage is insured or uninsured. Meanwhile, those switching lenders with uninsured mortgages must meet the stress test requirements again, unlike those with insured mortgages.
No immediate changes planned
Despite recognizing the unfairness, OSFI is not currently considering eliminating the stress test for uninsured mortgages at renewal.
Routledge explained that maintaining the stress test is part of a broader mandate to uphold robust underwriting standards across the lending industry.
“If you loosen one underwriting standard, you’d probably have to loosen more, and our mandate calls for us to be fairly vigilant on this,” he said.
Routledge did indicate that OSFI is open to exploring other ways to address the imbalance experienced by borrowers with uninsured mortgages.
“I think it is a legitimate challenge to say to OSFI, ‘Can you do something different so that imbalance goes away?’ We are thinking about it, and I do think it’s a fair critique,” he noted.
The most recent OSFI decision, made in December 2023, maintained the mortgage stress test at its current levels.
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