OSFI Rules to Cost Mortgage Renewers

Renewing a mortgage could soon get a lot more costly for 700,000+ Canadian families. And they’ll have OSFI to thank.

The banking regulator’s new stress test will drive up debt ratio calculations for most conventional borrowers by 6 to 7 percentage points. That’s enough to push a minority of renewers right out of the qualification zone.

Why this matters: Lenders use your debt ratio—which is basically your monthly obligations divided by your monthly gross income—to determine if they’ll approve you. If they think you have too much debt and can’t renew elsewhere, their incentive is to offer you higher mortgage rates.

The following data quantifies the impact:

  • 5.78 million Canadians households have a mortgage 1
  • More than 4 out of 5 have at least 20% equity 2
  • 10% to 17% (up to 1 in 6) of these borrowers have debt ratios that are too high to meet the government’s new stress tests 3

Almost two-thirds (65%) of mortgages each year are renewals, according to CMHC.

Jim MacGee, from the think tank C.D. Howe Institute, holds that OSFI’s new stress test for uninsured mortgages deprives borrowers of bargaining power, is anti-competitive, and will end up costing consumers. That’s his conclusion in this memo to Minister of Finance, Bill Morneau.

MacGee concedes that OSFI is right to add “a needed measure of prudence to underwriting standards.” But, “while a stress test for new mortgage originations makes sense,” he argues, “imposing a stress test on existing borrowers looking to renew their mortgage does not.”

OSFI’s policy change “unnecessarily limits competition,” states C.D. Howe, because it allows people to renew at their current lender without taking the stress test. But if those very same borrowers merely move their mortgage to a new lender (despite no new risk), suddenly the bank rule-makers want them to be stress tested.

The government’s guideline now “removes the option to shop for a better rate, and limits borrowers’ bargaining power on renewal,” writes McGee. “This is likely to result in higher rates for borrowers who already face high debt payments relative to their income.” And analysts at National Bank Financial agree. In a research note they write, “Banks may be in a better position to preserve margin” because of OSFI’s guideline.

Higher Rates. Harder Test.

If rates jump two points from here, people would be forced to prove they can afford payments at 7%. When was the last time prime borrowers had to qualify at 7%? Way back at the turn of the century.

“Ideally these rules would have been more sensitive to the business cycle,” says McGee. The problem is, assuming incomes don’t rise parallel with rates, a 7% qualification rate might block millions of Canadians from getting a cost-effective mortgage.

“Fortunately, there is an easy tweak to the details of the stress test to address these concerns,” McGee concludes. “…Remove the stress test on borrowers looking to renew an existing mortgage.”

Will OSFI do the right thing and make this rule adjustment? We’re guessing not anytime soon. Doing so would make it look like they didn’t think the rule through in the first place.

Options Remain, For Now

The new rules will discourage people from switching lenders. That’s a fact, especially if those people don’t shop around. But if higher-debt-ratio renewers consider non-federally regulated lenders, they’ll likely find some willing to lend to them without an onerous stress test. Albeit, it would likely be at a higher rate than if they could access all lenders, like they can today.

Your best bet if you’re renewing and don’t qualify with another bank: call a broker and/or shop mortgage rates on the Spy and then call a credit union.

1 Source: Mortgage Professionals Canada
2 Source: Mortgage Professionals Canada
Source: CIBC, Bank of Canada


  • Susan says:

    In preparing for renewals under the new rules, is it better to keep unused lines of credit open or close them. I have been told the debt ratio calculation assumes all available credit is maxed out but then I have also been told that the debt utilization score is improved by having a small amount of available debt actually used. We have about $30K of available unused credit. What should we do? Keep them or close them?

    • The Spy says:

      If you’re a disciplined borrower who pays on time, there’s no reason to close unused credit lines. From a credit scoring standpoint, you’ll be better off leaving them open.

      Debt ratio calculations somewhat depend on the lender. We haven’t seen many lenders change how they handle calculate debt ratios since OSFI’s announcement.

      Most lenders still assume that your payments (for debt ratio calculation purposes) are:

      * The actual payment for installment loans and mortgages
      * 3% of the balance on credit cards and unsecured lines of credit
      * Based on the balance owing, a 25-year amortization and the 5yr benchmark rate for secured lines of credit

      Other lenders use 0.65% or 3% of the balance for secured lines of credit. In some cases, a few still assume interest only payments are the minimum payment on secured lines of credit, but that’s far from the norm.