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As OSFI further opens the door to switching lenders, more consumers will win in the renewal game
Published on November 25, 2024 • Last updated 1 day ago • 4 minutes reading time
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Starting Thursday, uninsured bank borrowers will no longer have to prove they can afford a higher interest rate when switching lenders. Photo from Getty Images
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Since the federal mortgage stress test was introduced in 2018, a small percentage of mortgage extenders have found themselves caught in a poorly arranged marriage-like trap with their current lender. Government policy effectively prevented uninsured borrowers with higher debt ratios from switching lenders to get a better deal.
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Our banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), addressed this issue on Thursday, but with conditions. This is how it went:
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The previous policy
Seven years ago, federal regulators began requiring uninsured mortgage borrowers to prove that they could afford payments based on interest rates that were at least 200 basis points higher than the rate they actually paid. This “stress test” was critical to prevent excessive borrowing and prepare borrowers for the big rise in interest rates in 2022 and 2023.
But there was an unpleasant side effect. For some borrowers who had accumulated debt – for good, bad or unavoidable reasons – the stress test meant they could no longer meet lenders' debt ratio tests.
As a result, these people could not qualify with other lenders even if they have a perfect payment record and meet all other regulatory criteria, including good credit, verifiable income, sufficient equity, etc.
Consumer advocates charged that lenders could use their powerful analytics to take advantage of borrowers at renewal if they knew they couldn't switch lenders for a better rate. For these poor souls, OSFI's policy was tantamount to: “You take whatever interest rate your current lender gives you and you'll like it.”
It all came to a head in a March 2024 Competition Bureau report that criticized OSFI for potentially “harming borrowers and the competitive process.”
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OSFI, never one for bad publicity, gave in and did the right thing. In a conference call on Thursday, Tolga Yalkin, deputy superintendent of regulatory operations, admitted: “You can immediately see how this locks some borrowers into their current lender and in some ways makes it impossible for some of the most vulnerable homeowners to do this.” .”Find a better deal elsewhere.”
What OSFI did to fix the problem
Starting Thursday, uninsured bank borrowers will no longer have to prove they can afford a higher interest rate when switching lenders. The requirement is that the borrower is not allowed to increase either the loan amount or the remaining contractual mortgage repayment.
Note that some banks do not allow this flexibility from day one. It may take weeks for all banks to adjust their policies.
The problem is that this stress test exception only applies if you move “from one federally regulated lender to another,” OSFI says.
That means if you want to transfer your uninsured mortgage to a bank from one of Canada's 392 provincially regulated credit unions and caisses populaires, you're out of luck, according to OSFI — unless you pass the stress test.
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(Side note: For default-proof mortgages, the government made it clear last year that they can be transferred to a new lender without the 200 basis point stress test.)
This also means banks cannot accept non-stress tested reshuffles from mortgage finance companies (MFCs). MFCs are non-bank competitors that finance their mortgages with bank capital and underwrite them according to OSFI standards. In all respects, an MFC mortgage is just as safe as a bank mortgage, but apparently this is not enough for the regulator.
The result is that MFC and credit union innovators with heavy debt loads now have fewer alternatives than bank customers. This is actually a gift to non-bank lenders, as a small portion of their borrowers are now more captive.
However, MFCs are confident that OSFI will ultimately allow uninsured bank borrowers to switch to MFCs without a stress test. However, the supervisory authority was unable to comment on this at the time of going to press.
Another limitation of OSFI's new policy is that it doesn't apply if you change lenders before your renewal date. This appears to be an unnecessary and arbitrary restriction on borrowers, as banks carefully review mortgage applications regardless of when a person switches lenders.
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Furthermore, it's not just by switching lenders that people take on more debt or risk. In fact, this policy prevents borrowers from getting better terms when interest rates fall, including the “at-risk” borrowers that OSFI is concerned about. But in reality, due to the early repayment penalty, only a very small proportion of borrowers switch before the extension anyway.
Net impact
According to the Competition Bureau, three out of four borrowers are currently uninsured, but only one in eight change lenders at renewal. OSFI's policy change will allow a larger group of mortgage holders to shop around. But we're still only talking about a single-digit share of customers moving on to greener pastures.
The bankers I spoke with are aware of the flight risk of this tiny contingent and say they will price renewals more aggressively to retain borrowers in select cases.
In short, by OSFI further opening the door to switching lenders, more consumers will win in the renewal game. This applies regardless of whether the borrower switches to a better deal or is offered higher renewal prices by their existing bank.
However, if OSFI's policies were a little more flexible, even more consumers would benefit.
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Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.
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