Following OSFI’s removal of the stress test requirement for uninsured switches last month, BMO initially adopted the change but reversed course this week, reinstating the requirement.
As a result, borrowers with uninsured mortgages looking to switch to BMO must qualify using the higher of the benchmark rate (5.25%) or their contracted rate plus 2%.
- WHAT’S A STRAIGHT SWITCH? A straight switch refers to transferring a mortgage from one lender to another without increasing the loan amount.
- WHAT’S AN UNINSURED MORTGAGE? An uninsured mortgage is a home loan that doesn’t have mortgage default insurance. This typically applies to loans with a down payment of 20% or more.
BMO informed broker partners on Monday that, “Effective immediately, the change communicated in November will be cancelled, and files will continue to be reviewed using OSFI’s stress test,” according to a document obtained by Canadian Mortgage Trends.
The bank stated it will continue applying OSFI’s stress test, despite it no longer being mandatory, while it “explores alternative stress test approaches” for uninsured switches at renewal.
When reached for comment, a BMO spokesperson told Canadian Mortgage Trends the following: “Our underwriting practices are competitive and consistent with regulatory guidelines.”
OSFI still requires lenders to ensure borrowers can manage debt
When OSFI announced on November 21 that it was removing the mandatory stress test for straight switches of uninsured mortgages, it didn’t absolve lenders of their responsibility to conduct thorough due diligence on incoming files.
“This doesn’t mean lenders won’t apply any stress test,” former OSFI Assistant Superintendent Tolga Yalkin said during a call with media.
“In fact, they have to apply a stress test to calculate debt serviceability measures like GDS and TDS ratios,” he continued. “It just means that it will be up to them based on general principles of sound mortgage underwriting, including in our guideline B-20 to determine what stress test is appropriate.”
That’s left lenders adopting a variety of approaches to qualification standards for uninsured straight switches. This divergence in practices means borrowers face varying requirements depending on the lender.
While some banks may apply a stress test similar to OSFI’s previous guidelines—or, in the case of BMO, opting to maintain it entirely for the time being—others might introduce more flexible or customized calculations tailored to their risk tolerance and underwriting policies.
How other banks are responding
We reached out to the country’s major banks to find out how they’re handling these changes. Here’s what they had to say…
RBC
“With regards to this OSFI policy, RBC is using the contract rate to qualify clients based on the Nov. 21 change. We continue to follow prudent underwriting standards to address the unique risks of our clients. For additional information about the policy, we refer you to the CBA for their industry perspective.”
TD
“While the OSFI prescribed minimum qualifying rate is no longer required for uninsured mortgage borrowers that switch at renewal, TD’s internal policies and practices are aligned with OSFI’s continued expectation that debt servicing ratios are calculated on a forward-looking basis with appropriate consideration for the possibility of higher future interest rates, or other situations that could cause the borrower to have difficulty making payments.”
Scotiabank
“Scotiabank will offer straight switches for uninsured mortgages aligned with OSFI’s recent guidance on the qualifying rate. We are working on the details of our program and will be communicating with our distribution channels in the near future.”
National Bank
“As always, we follow OSFI’s directions, including the latest November 21, 2024 update. Therefore we no longer apply the Minimum Qualifying Rate (MQR) calculation in qualifying customers switching their mortgages at renewal from a Federally Regulated Financial Institutions (FRFI). For these cases, we apply uniform qualification standards in line with the regulations put forth by OSFI.”
CIBC was contacted but didn’t provide a response by press time. We’ll update this story as soon as we hear back.
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Last modified: December 19, 2024