If you’re diving into the world of mortgages, you’ve probably come across terms like “insured” and “uninsured” mortgages. But what exactly do they mean, and how could the recent changes from the Office of the Superintendent of Financial Institutions (OSFI) affect you if you’re considering an uninsured mortgage?
Let’s break it down and get into everything you need to know about uninsured mortgages, OSFI’s recent adjustments, and how these changes impact Canadians looking to switch mortgage providers.
What Is An Uninsured Mortgage?
In simple terms, an uninsured mortgage is a loan that doesn’t have mortgage insurance to protect the lender. This type of mortgage is typically taken by buyers who have a down payment of at least 20% of the home’s purchase price. Unlike insured mortgages, which are protected by mortgage default insurance (and are usually required when the down payment is below 20%), uninsured mortgages involve a bit more risk for lenders.
Uninsured mortgages, however, give homebuyers a few advantages, like fewer restrictions. For example, if you qualify for an uninsured mortgage, you won’t need to pay for mortgage insurance, saving you some cash over the loan term. Plus, it opens up options for buying a more expensive property that might not be eligible for a standard insured mortgage.
Uninsured vs. Insured Mortgages
To better understand the benefits and requirements of uninsured mortgages, let’s quickly break down the difference between insured and uninsured mortgages:
Insured Mortgages
Insured mortgages are protected by mortgage insurance, which the borrower pays. Generally required for buyers with less than a 20% down payment, insured mortgages limit risk to lenders. This protection means the lender can approve you even with a smaller down payment, making homeownership more accessible but with added insurance premiums.
Uninsured Mortgages
With a 20% or greater down payment, homebuyers can qualify for an uninsured mortgage, which lacks the extra insurance coverage. This generally saves buyers on insurance premiums but may come with a few more conditions, like the need to pass a mortgage stress test which all buyers need to pass.
Now, let’s explore the “stress test” and why it’s essential for uninsured mortgages.
What Is The Mortgage Stress Test?
The mortgage stress test is a regulatory safeguard introduced by the Office of the Superintendent of Financial Institutions (OSFI) to help ensure that homebuyers can handle potential increases in interest rates in the future. It’s a way for lenders to confirm that borrowers won’t struggle with payments if rates rise significantly down the line.
When you apply for a mortgage, lenders don’t just look at the interest rate you’re offered; they also assess your ability to make payments at a higher rate, known as the “stress test rate.” This stress test rate is set as either 5.25% or 2% above your offered mortgage rate—whichever is higher. This means that even if your initial rate is lower, you need to show that you can afford payments at a higher rate to pass the test.
The purpose of this rule is to reduce the risk of defaults and financial stress for borrowers if rates increase, protecting both borrowers and the stability of Canada’s housing market.
Why Was the Stress Test Introduced?
The mortgage stress test was introduced by the Office of the Superintendent of Financial Institutions (OSFI) as a protective measure to maintain stability in the Canadian housing market. Its main goal is to ensure that borrowers can handle their mortgage payments even if interest rates rise in the future. By requiring lenders to assess borrowers at a higher “stress test” rate, this rule helps reduce the risk of defaults and foreclosures, which can have a significant ripple effect on the economy, potentially leading to market instability and financial stress for families.
Initially, the stress test applied to both new mortgage applications and renewals. This meant that even if someone had a mortgage and wanted to switch lenders at renewal, they’d need to requalify at the stress-tested rate. While this helped to ensure a stable market, it also made it tougher for some borrowers to qualify when switching lenders, potentially limiting their options for securing better rates. OSFI’s goal was to create a responsible borrowing environment while safeguarding Canada’s broader economic stability.
OSFI’s Big Change: Stress Test Requirements For Switching Mortgage Providers
On June 20, 2023, OSFI made a game-changing announcement for uninsured mortgage holders: borrowers will no longer have to pass the stress test if they want to switch lenders at the end of their term. This change only applies to uninsured mortgages, and it makes the process of switching lenders much easier for many homeowners.
Previously, if you wanted to switch to a new lender when your term ended, you had to pass the stress test all over again. This was a hurdle for some borrowers because their financial situation or the overall economic climate might have changed since their original application.
| Key Impact: With OSFI’s change, homeowners with uninsured mortgages can now shop around for better rates at the end of their mortgage term without worrying about re-qualifying under the stress test. This increases the bargaining power of borrowers, allowing them to find more favourable terms or lower rates without being restricted by the stress test requirements. |
Why OSFI Made This Change
OSFI recognized that forcing uninsured mortgage holders to undergo the stress test when switching lenders was limiting competition and potentially keeping some borrowers “stuck” with their current lenders. By removing this requirement, OSFI aims to make the market more competitive and give Canadians more options when finding the best mortgage terms.
How Does This Change Affect Homebuyers?
This change primarily benefits current homeowners with uninsured mortgages, especially those who are looking to switch providers for a better rate or different terms. Here are a few scenarios where this change can make a difference:
- Better Rate Opportunities. Without the stress test requirement, homeowners can now shop around for a better rate without worrying about disqualification. This could save homeowners thousands of dollars over their mortgage term.
- Increased Flexibility. Borrowers with uninsured mortgages are no longer forced to stick with their current lender. They can now explore other options with less hassle.
- Lower Monthly Payments. By switching to a lender with lower interest rates, borrowers could lower their monthly payments, reducing financial strain and potentially freeing up more money for other needs or investments.
- Improved Bargaining Power. When your mortgage term ends, you have the power to negotiate with your lender for better terms. With the ability to switch lenders without the stress test, borrowers can negotiate with more leverage, knowing they aren’t locked in by the stress test requirement.
Should You Get An Uninsured Mortgage?
If you’re able to make a down payment of 20% or more, an uninsured mortgage could be the right fit for you. Here are some pros and cons to consider:
Pros Of An Uninsured Mortgage
- No mortgage insurance: You won’t need to pay mortgage insurance, which can save you money.
- Greater flexibility: With the recent OSFI rule changes, you can switch lenders more easily.
- More buying power: With no insurance requirements, you have more flexibility in choosing a property that suits your needs and budget.
Cons Of An Uninsured Mortgage
- Higher interest rates – Sometimes uninsured mortgages may have higher rates due to the lack of mortgage default insurance, which is a type of insurance that protects the lender in the event of default.
- High down payments: To avoid mortgage default insurance and have an uninsured mortgage, you need to make a down payment of 20% or more. Moreover, if you’re buying a home valued at $1.5 million and higher, you must provide a down payment of 20% or more. This is because CMHC insurance is only available to homes valued up to $1.5 million. As such, down payments on insured mortgages are generally higher compared to insured mortgages.
Choosing Between Insured and Uninsured Mortgages
In the end, the decision comes down to your financial situation and long-term goals. An insured mortgage might be ideal for first-time buyers with a smaller down payment, as it allows them to access homeownership more easily, albeit with added insurance costs. Meanwhile, if you’re looking to buy a property with a substantial down payment and want to avoid insurance costs, an uninsured mortgage may provide the flexibility and cost savings you’re after.
Key Considerations For Uninsured Mortgage Holders
If you’re considering an uninsured mortgage, it’s essential to understand what OSFI’s recent changes mean for you:
- Renewal Process: You won’t face the stress test if you switch providers, making it easier to get better rates at renewal.
- Interest Rate Changes: While the stress test doesn’t apply when switching lenders, it’s still wise to prepare for potential rate hikes that could affect your monthly payments.
- Financial Planning: Since uninsured mortgages require at least a 20% down payment, it’s important to assess your finances and long-term goals to make sure an uninsured mortgage fits your situation.
How To Shop Around For A Better Uninsured Mortgage
If your mortgage term is coming to an end, and you’re ready to explore your options, here are some tips for switching providers without the stress test hurdle:
- Research Rates From Multiple Lenders: Since you’re free to switch without the stress test, check out rates from several lenders to see who offers the best deal.
- Consider Working With A Mortgage Broker: Mortgage brokers can help you compare rates across lenders and may be able to secure better terms than if you applied on your own.
- Negotiate With Your Current Lender: Sometimes, simply letting your current lender know you’re considering a switch can lead to a better offer. Since you now have the freedom to switch, use it as leverage for better terms.
Wrapping Up: The New Era For Uninsured Mortgages In Canada
The recent change by OSFI represents a shift toward increased flexibility and freedom for homeowners with uninsured mortgages. By removing the stress test requirement for those switching lenders, OSFI has created an environment that empowers borrowers to seek better mortgage terms and competitive rates.
The new landscape not only gives you more freedom but also encourages a healthy, competitive mortgage market. Whether you’re a homeowner looking to switch providers or a potential buyer considering an uninsured mortgage, understanding these changes can help you make informed decisions and take advantage of the opportunities they bring. So, if you’re in the market for a mortgage or thinking about switching, this might be the perfect time to explore your options and find the best fit for your financial future.
