Things Just Got Interesting

The real estate market is currently undergoing significant changes, particularly concerning mortgage rates and qualification standards. Homeowners who secured five-year mortgages at remarkably low rates in 2021 and 2022 are now facing renewal at today's much higher rates. This shift presents both challenges and opportunities within the market as many borrowers struggle to re-qualify under these new conditions.

The Canadian government has taken steps to address this looming challenge. Superintendent Peter Routledge recently announced that on November 21, 2024, the Office of the Superintendent of Financial Institutions (OSFI) will implement a new policy. This change aims to make it easier for borrowers to switch lenders at renewal without having to prove they can afford their mortgage at a higher rate. This adjustment is designed to help mitigate potential disruptions (read a tidal wave of defaults) in the mortgage and real estate markets.

The stress test, a significant component of OSFI's B-20 Guideline introduced in January 2018, required borrowers with uninsured mortgages—those with a down payment of 20% or more—to qualify at the higher of the Bank of Canada’s five-year benchmark rate or their mortgage rate plus 2%. The goal was to ensure borrowers could withstand future rate increases. However, this policy often hindered borrowers from switching lenders, even if they maintained the same loan amount and amortization schedule.

The upcoming policy change applies specifically to straight switches of uninsured mortgages, providing a major opportunity for borrowers to shop around for better terms without the burden of the stress test. This presents a significant opportunity for both borrowers and lenders, as it encourages competition and could lead to more favourable mortgage terms for consumers.

This adjustment is a clear shift from OSFI’s earlier stance. As recently as June, OSFI maintained the necessity of the stress test for uninsured mortgage switches, citing sound risk management as a priority. However, upon further review, OSFI identified two primary reasons for reversing its stance.

Firstly, feedback from the industry and Canadian homeowners highlighted an imbalance between insured and uninsured mortgagors at the time of renewal. Secondly, OSFI's data review revealed that the prudential risks the stress test aimed to address have not significantly materialized. By allowing more flexibility, OSFI enables banks and lenders to compete and take reasonable risks. I’d also be willing to wager that the not-so-invisible hand of the government was involved, given the likelihood of a federal election in the next 12 months.

Moreover, the Competition Bureau raised concerns about the fairness of the stress test, suggesting in March that allowing uninsured mortgage borrowers to switch lenders without undergoing the stress test could enhance fairness and competition. The federal government’s recent expansion of eligibility for 30-year amortizations for insured mortgages to all first-time homebuyers and purchasers of new builds, along with increasing the price cap from $1 million to $1.5 million, also reflects a broader strategy to ease market pressures.

For homeowners, these changes offer a window of opportunity to explore better mortgage options. With increased flexibility in switching lenders and extended terms for insured mortgages, borrowers can potentially secure more favourable conditions. Lenders, on the other hand, have the chance to attract new clients by offering competitive rates and terms. We expect to see some rate competition amongst the lenders in the near future - which will be further good news for buyers in the short term. Short term because none of these changes address the issue around the supply of homes. If anything, these changes will most certainly spur activity with buyers. The risk is that this flood of new activity will drive prices upwards again and just reinforce that housing in this country is getting more and more unaffordable.

We’ve talked about this in the past: our government agencies are addicted to short term fixes, which is exactly what the recent rash of changes has reflected. Nothing here is addressing the systemic long term issues impacting housing and home ownership. On one hand, these measures will likely help the market avert a crisis in the mortgage renewal process for next year and will help get a few more entry level and new build buyers off the fence. On the other hand, this could also be additional fuel on a real estate market that is once again ready to flare into a 3 alarm blaze.

This is going to be an interesting next 12 months. Take advantage of the opportunities as they develop and be very mindful of falling into the bidding trap we’ve witnessed in the past.

As always, we’re here to answer any questions and give you guidance surrounding mortgage rates, buying, selling, or any other help you may need as you navigate this complex market.

Thank you for allowing us to be part of your journey.

Paul Fitzpatrick

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