Are you hoping for a better rate when your mortgage renews?
If you have a default-insured mortgage (often called a CMHC mortgage) and haven’t made any major changes — you might be able to switch lenders by re-qualifying at your contract rate (the rate you’d actually pay) instead of the higher stress-test rate.
Why does that matter?
With the federal mortgage stress test, you must prove you can handle payments at 2% above your contract mortgage rate (or at 5.25%, whichever is higher) when setting up a mortgage with a new lender.
For example, a 5-year fixed rate at 5.5% (likely much higher than when you first got your mortgage) would mean qualifying at 7.5%, which may push your affordability numbers too high and stop you from going to another lender for a better deal.
Backed into a mortgage corner? You’ll likely pay more.
If you renew and stay put, you won’t need to re-qualify. But the stress test may back you into a corner with little choice but to pay what’s offered for your next term — funny how a lack of competition can leave you holding the (mortgage) bag.
Insured mortgage switches now have an out. This stress test exemption means you can shop around for your best budget solution — and even help you negotiate a better rate where you are.
Why the new rule for insured switches?
This measure is actually not new, despite being touted in the new Canadian Mortgage Charter recently released by the Canadian government.
The Canadian federal regulator, OSFI (Office of the Superintendent of Financial Institutions), highlighted this rule early in the fall, bringing it into mainstream lending consciousness. Most lenders scrambled to adopt the measure.
(Before being extended to all insured mortgages, a stress test exemption had existed for mortgages originating in 2016 or earlier if the default insurance was still intact).
Many industry experts have argued that continuing to use the stress test for proven mortgage holders (when rates have likely peaked) interferes with homeowner choice and natural industry competition that can help keep rates lower.
What does ‘insured’ mean for this switch rule?
It means you initially paid a default insurance premium — usually as a high-ratio mortgage of less than 20% down payment, but not always. Some home buyers pay for default insurance to allow more options at renewal (such as access to better rates).
Your insured mortgage is still eligible for a stress test exemption, if:
- The amortization hasn’t been extended (a mortgage recast doesn’t count).
- You haven’t refinanced to add more to the loan.
- You purchased your home for less than the $1M insurable limit even though it may be worth more now.
What if you break your mortgage before renewal — can you still take advantage of this rule?
Yes, you and your insured mortgage don’t have to wait until renewal if you determine you’d save by switching to a better rate. Typically, breaking your term incurs a pre-payment penalty, and the new mortgage can have a maximum of $3K in penalties and fees added at the time of transfer.
Why aren’t uninsured mortgages included?
Mortgages insured against default means the Canadian government fully backs them, so a lender doesn’t take on extra risk to re-qualify you at just the contract mortgage rate (especially when rates are likely to be at the peak of this central bank cycle).
Uninsured mortgages are riskier for default, backed only by the home’s resale value. For these mortgages, the extra assurance provided by the stress test as rates went up has helped keep most Canadian homeowners on track and our country’s banking system one of the soundest in the world.
Does every lender have to comply with this ‘insured switch’ rule?
Actually, no. It’s the lender’s choice to abide by this OSFI guidance. But with the budget stress of today’s higher current interest rates, many have implemented the changes needed to come on board.
An expert mortgage broker can help ease your rate pressure when it’s time to renew.
Whether insured or uninsured, it’s important to know the rate and mortgage options available to you. If you do nothing and automatically sign with your lender, you could miss out on substantial mortgage savings for your next term.
Talk to an unbiased, expert broker at True North Mortgage about 4-6 months before your mortgage renewal date (or set up a reminder, and they’ll contact you). Their brokers are salaried and highly trained, and their access to a volume discount with several accredited lenders may get you a deal you didn’t know was available.
Get fast, expert mortgage advice to save thousands with your best rate and stress-free process. Contact Canada's No. 1 Mortgage Broker today.