Mortgage Basics

Is There a Stress Test for Mortgage Renewals?

Is There a Stress Test for Mortgage Renewals?
Written by
  • Ashley Howard
| 17 November 2023
Reviewed, 17 November 2023
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    In the face of financial strain caused by inflation and increased borrowing costs, it’s crucial to cover all your bases before making significant financial decisions. If you’re a homeowner, one such decision is your mortgage renewal. 

    If you’re part of the 2.2 million that will experience interest rate shock in the next few years, shopping around to ensure you get the best rate and terms available will likely be at the top of your to-do list. However, before you decide to renew with a new lender, it’s essential to understand the mortgage stress test and how it may affect your renewal.

    Key Takeaways

    • The stress test is required to assess risk and determine if you can afford your mortgage should interest rates increase during your term. 
    • Uninsured mortgages must pass stress test requirements to switch to a new lender at renewal.
    • Insured mortgages do not need to meet stress test requirements when switching to a new lender at renewal.

    Understanding the Mortgage Stress Test

    The stress test is a federal government requirement for lenders to assess a borrower’s risk. This is done to determine if you could afford your mortgage payments if interest rates were to rise. The stress test means you must be able to qualify for your mortgage at either the higher of the contract mortgage rate +2% or 5.25%.

    As contract mortgage rates are currently higher than 5.25%, you will be qualified at the contract rate +2%. If you were to be offered a rate of 5.54%, your qualifying rate for the mortgage would be 7.54% (5.54% + 2%). 

    You won’t need to undergo the stress test if you renew with your current lender. 

    If you plan to switch to a new lender and are an uninsured mortgage holder (you originally put down 20% or more as a downpayment), you must re-qualify at the new lender with the stress tested monthly mortgage payment amount, calculated on your remaining amortization. This is due to the new lender needing to complete their due diligence as they assume ownership of the risk for your mortgage. 

    However, if you are an insured borrower (you originally put down less than 20% and have mortgage loan insurance) based on a new report by OSFI, you would be exempt from the stress test requirements. This is due to the risk to the life of the mortgage already being transferred to the insurer.  However, you’d still need to show that you can carry the remaining balance of your mortgage at your remaining amortization on your new contract rate.

    When to Start Comparing Mortgage Rates

    To ensure you have enough time to compare your options, start shopping for a better mortgage rate at least 4 months before your renewal. While your current lender may ask you to renew early, a renewal statement is typically issued only 21 business days in advance of your maturity date. Most lenders can hold a rate for up to 120 days, giving you ample time to explore your options.

    Switching Mortgage Lenders: Is it Worth it?

    You may want to renew your mortgage with a different lender for several reasons. One compelling reason is the potential for a lower interest rate, which can save you money while providing you the ability to shorten your amortization period if you decide to carry a higher payment. 

    Even if you find that the rates offered by other lenders are not significantly better, it’s still worth considering the features offered with their mortgage products. Assess whether their terms align better with your financial situation, payment frequency, or prepayment privileges.

    Staying with Your Current Mortgage Lender

    While switching lenders may have the potential for better rates and terms, sticking with your current lender may be the best option. If you have an uninsured mortgage, re-qualifying elsewhere with high interest rates may be impossible. If you remain with your current lender, ensure you negotiate. Rarely will your lender’s first offer be their best, especially if they suspect you won’t pass the stress test to switch. 

    Benefits of Shopping Around for Mortgage Renewal

    Shopping around for mortgage renewal offers several benefits:

    • Potential Cost Savings: You may be able to save money over your mortgage term by securing a lower interest rate. Even a slight reduction in interest can result in significant savings.
    • Shortened Amortization Period: A lower interest rate could free up your budget and allow you to make prepayments or change your payment frequency to an accelerated payment option. These benefits can help you pay off your mortgage faster, as more payments go toward the principal balance, saving you interest costs.
    • Better Mortgage Features: Different lenders may offer mortgage products with more suitable features for your financial needs, such as flexible payment options or the ability to make additional payments.
    • Opportunity to Reevaluate Your Financial Goals: The mortgage renewal process allows you to reassess your financial goals and make necessary adjustments. This can help you align any restrictions on your mortgage with your long-term plans.

    Factors to Consider When Comparing Mortgage Rates

    When comparing mortgage rates from different lenders, looking beyond the interest rate alone is important. Consider the following:

    • Features and Benefits: Review the features and benefits of each mortgage product, including prepayment penalties, payment frequencies, and any additional fees.
    • Customer Service: Evaluate the quality of customer service offered by each lender. Good communication and support can significantly affect the mortgage renewal process.
    • Mortgage Features: Consider any additional features or benefits offered by different lenders, such as the ability to port your mortgage or access to a line of credit.
    • Overall Cost: While the interest rate is important to most borrowers, it’s essential to consider the overall cost of the mortgage, including any fees or charges associated with the loan.

    The Importance of Professional Guidance

    Navigating the mortgage renewal process can be complex, especially if you will be subject to the mortgage stress test. Seeking professional guidance from a mortgage expert can help you find the best mortgage option for your needs. A knowledgeable expert can streamline the process by providing personalized advice and assistance in comparing rates and terms from different lenders, saving you time and money. 

    Frequently Asked Questions

    Do I need to be stress tested when I renew my mortgage?

    You do not need to be stress tested at renewal if you remain with your current lender, regardless if you have an insured or uninsured mortgage. If you have an insured mortgage, you will have the opportunity to switch lenders at renewal without the need to be stress tested. However, you will be stress tested if you have an uninsured mortgage and wish to switch lenders at renewal.

    How can I pass stress test requirements?

    To pass the stress test requirements, you must qualify for your mortgage at 5.25% or the contract rate +2%, whichever is higher. When the lender assesses your ability to repay the mortgage at a higher rate, they will look at your debt service ratios. They will use two calculations called gross debt service (GDS) and total debt service (TDS) ratios to determine if they fall within the required range to approve you for the mortgage.

    How can I avoid being stress tested?

    The stress test is a federal government requirement and will apply to all federally regulated lenders. Alternative mortgage solutions like private lenders and non-federally regulated credit unions may allow you to qualify for a mortgage without the stress test; however, you’ll pay more interest on your mortgage.

    Final Thoughts 

    If you’re up for renewal in the next few years, it’s vital to be proactive and understand how your mortgage may impact your renewal decision. If you have an uninsured mortgage, shopping around to renew with the best rate may be challenging due to stress test requirements. However, you can still make rate comparisons to give you an edge when it comes time to negotiate with your current lender. 

    If you have an insured mortgage, shopping around will ensure you sign on for a new term with your current lender or a new one that best aligns with your financial goals. 
    Whether you decide to renew with your current lender or shop around, you will need to evaluate more than just interest rates. Compare the terms and conditions, features, and benefits that may be important for you, such as prepayment privileges and accelerated payment options. Further, seek professional guidance from a mortgage professional to help you secure the best mortgage rate and terms for your renewal.