When your mortgage comes up for renewal, you have the option of staying with your existing lender or finding a new one. However, if you choose to go with a new lender, there are a few hoops you’ll have to jump through – with one rare exception. It’s called a straight switch.
Homeowners often expect they will have to requalify for a mortgage and undergo a stress test when switching lenders. However, you may not have to go through this process if you have insured mortgage.
The Office of the Superintendent of Financial Institutions (OSFI), which regulates banks as well as trust and loan companies, recently noted that lenders don’t need to use the minimum qualifying rate (MQR)—also known as the stress test—for homeowners with insured mortgages when choosing a new lender.
Towards the end of last year, the OSFI sent a letter to all federally regulated financial institutions, stating that insured borrowers “are exempt from the re-application of the MQR when switching lenders at renewal. This is because the borrower’s credit risk has been transferred for the life of the loan to the mortgage insurer.”
What is the minimum qualifying rate?
The minimum qualifying rate for insured mortgages is either the benchmark rate (currently 5.25%) or the borrower’s contract rate plus two percentage points — whichever is higher. For most people, the MQR will be the latter because of the rise in mortgage rates over the past two years.
However, because mortgage rates rose so high and so quickly last year, most mortgage-holders can’t afford to requalify for their MQR – which means that they also can’t shop around different lenders and rates at renewal to try saving money.
Unless you qualify for a straight switch. This little-known rule has been available since the stress test came into effect but was only revealed publicly in the letter. Although the test is no longer needed for those with insured mortgages, lenders can also apply it to borrowers if they choose to do so.
What if your mortgage isn’t insured?
Currently, anyone with an uninsured mortgage must still undergo a stress test if they want to switch lenders.
According to the Canada Mortgage and Housing Corporation, about 73% of those with a mortgage at a chartered bank had an uninsured mortgage in the second quarter of 2023 (the latest statistics available).
The minimum qualifying rate for insured mortgages is the same as the one for uninsured mortgages.
While you do have to requalify, you have more options than a straight switch – you can change your amortization term, for example, thereby reducing the amount of interest paid each month.
Say you have 20 years left in your amortization period, and you decide to get a mortgage with a 25-year amortization.
Let’s assume you took out a $400,000 mortgage with a five-year fixed rate of 3.19% in 2019, and your mortgage payments were around $1,932 a month.
After five years, your balance would be about $343,137.
Today, you might be able to get a five-year fixed rate of 5.09%. With a 20-year amortization, the monthly payment will be about $2,272. However, with a 25-year amortization, you should expect a monthly payment of about $2,013.
While it’s not a huge monthly difference, it’s does leave you with more than $3,100 a year that can help you deal with higher food costs or other expenses. The downside is that you will end up paying more interest over the life of the new loan.
Will uninsured mortgages ever be able to switch lenders without requalifying?
While OSFI noted that lenders were hoping straight switches would be allowed for uninsured mortgages and exempted from the MQR, the regulator is against the idea, stating, “Exempting all straight switch renewals from the MQR could cause lenders to compete for loans that do not meet OSFI’s expectations.”
Mortgage Professionals Canada, an industry association that represents mortgage brokers, lenders, insurers, and service providers, wants the federal government to eliminate the stress test eliminated for switches, renewals, or transfers if there isn’t an increase in the principal.
“This would help borrowers service their debts by finding a more competitive rate at renewal and allow greater consumer choice, driving more affordability and competition among lenders,” it said in a statement.
Gordon McCallum, president of Edmonton-based brokerage First Foundation, agrees.
“Unnaturally restricting the transfer of mortgages at renewals gives incumbent lenders an unfair advantage and the opportunity to overcharge,” he wrote in a recent blog post.
However, as rates are predicted to go down beginning in 2024, there may be less urgency for uninsured mortgage-holders to access straight switches in the future.
Insured mortgage holders can shop around for a new lender at renewal time without having to go through the stress test. Although those with an uninsured mortgage still need to be tested by lenders, they have the option of increasing their amortization period to help offset higher mortgage payments due to the rise in rates.
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Engaging a mortgage broker before renewing can help you make a better decision. Mortgage brokers are an excellent source of information for deals specific to your area, contract terms, and their services require no out-of-pocket fees if you are well qualified.
Here at RATESDOTCA, we compare rates from the best Canadian mortgage brokers, major banks and dozens of smaller competitors.