Drop the mortgage stress test at renewal, competition watchdog urges Ottawa

The Competition Bureau is urging the federal government to waive the mortgage stress test for all borrowers at renewal, arguing it can help Canadians get a better rate.

Canada’s competition watchdog is urging Ottawa to drop requirements for some borrowers to pass the mortgage stress test at renewal, arguing it limits Canadians’ abilities to shop around for a better rate.

The Competition Bureau issued a report Thursday afternoon examining concentration in Canada’s financial sector and how a lack of competition impacts affordability for customers interacting with their banks.

Among the recommendations from the watchdog was waiving the need to pass the mortgage stress test again when a borrower with an uninsured mortgage renews their term.

The stress test, also known as the minimum qualifying rate, seeks to insulate homeowners against sudden increases in interest rates from the Bank of Canada. The stress test requires borrowers to qualify for a mortgage at a rate of 5.25 per cent or two per cent above the contract rate, whichever is higher, in order to prove they could handle higher monthly payments if the central bank rate rose rapidly.

Passing the stress test usually limits the size of a mortgage a borrower can qualify for and determines whether a lender will offer a homeowner a mortgage in the first place.

When a homeowner is renewing their mortgage, they do not need to pass the stress test again as long as they re-up with their existing lender. But if they want to shop around for a better rate, they’ll have to go through the process from scratch, including passing the minimum qualifying rate.

This has major implications for the rate that a consumer can negotiate at renewal, the Competition Bureau explains.

“With the current high interest rates, some borrowers may be unable to pass the stress test even though they have good credit and would have been able to service their loan,” the report said.