The Canadian mortgage landscape has seen significant adjustments in 2024, with two major announcements that will affect both first-time homebuyers and homeowners renewing their mortgages. These changes aim to make homeownership more accessible and foster competition in the lending market.

The federal government has raised the insured mortgage cap from $1 million to $1.5 million, providing more flexibility for first-time homebuyers, especially in high-priced markets. Meanwhile, the Office of the Superintendent of Financial Institutions (OSFI) has eliminated the mortgage stress test for homeowners switching lenders during renewal, potentially lowering barriers for borrowers looking to save money on their mortgage.

In this blog, we’ll break down these updates and examine their potential impact on the Canadian housing market.

(p.s. subscribe to our free weekly newsletter so you don’t miss out on important news like this!)

Federal Government’s Mortgage Update: Raising the Insured Mortgage Cap

What Is an Insured Mortgage?

For first-time homebuyers, an insured mortgage is a government-backed loan that protects lenders in case the borrower defaults. This type of insurance is typically required for buyers with a down payment of less than 20% of the home’s purchase price. The insurance is provided by agencies like the Canadian Mortgage and Housing Corporation (CMHC) and two private insurers, and allows buyers with smaller down payments to access the housing market.

With the recent changes, the federal government has increased the maximum home price eligible for insured mortgages. This extension allows more buyers to finance homes that exceed the previous $1 million limit, making it easier for first-time buyers in competitive markets to secure financing. Learn more about insured mortgages.

Previous Cap vs. New Cap

Before this update, the limit for an insured mortgage was capped at $1 million. In cities like Vancouver, Toronto, and Montreal, where housing prices are typically much higher, this limit posed challenges for first-time buyers trying to break into the market. By raising the insured mortgage cap to $1.5 million, the federal government hopes to create more opportunities for buyers in expensive urban markets, while still maintaining affordability standards.

Impact on First-Time Home Buyers

The new $1.5 million cap offers first-time homebuyers more options, particularly in cities with high property values. Now, buyers who may have previously struggled to purchase in markets like Toronto or Vancouver can access homes at a higher price point while keeping their down payment under 20%. However, buyers should still be cautious, as this increase in buying power can lead to higher overall debt levels, making it important to stay within a manageable affordability range.

OSFI’s Removal of the Stress Test for Mortgage Renewals

What is the Mortgage Stress Test?

The mortgage stress test was introduced to ensure that borrowers could handle interest rate increases. It requires homebuyers and renewing homeowners to qualify for their mortgage at a rate higher than their contract rate, helping to protect against future financial strain. OSFI’s recent decision removes this requirement when homeowners are renewing their mortgages with a new lender, allowing borrowers to shop for better rates more easily. Learn more about the stress test.

New Rule: No Stress Test When Switching Lenders

Under the new rule, borrowers will no longer need to pass the stress test if they choose to switch lenders during a mortgage renewal. This change is expected to encourage more competition among lenders, as homeowners will now have greater freedom to explore better mortgage options without the additional hurdle of the stress test. This could lead to more competitive rates and better terms for borrowers.

Impact on Borrowers and the Market

By eliminating the stress test for renewals, OSFI is opening the door for more competition among lenders, which could lead to significant savings for homeowners. Many borrowers hesitate to switch lenders due to the stress test requirements, even if better deals are available. Now, homeowners can more easily pursue those savings, driving more competitive offers from lenders.

Why the Federal Government Made This Change

The decision to raise the insured mortgage cap from $1 million to $1.5 million was driven by the need to address Canada’s rapidly rising home prices, particularly in urban areas. Cities like Toronto and Vancouver have seen average home prices exceed $1 million, making it difficult for first-time buyers to enter the market. By increasing the cap, the government aims to make homeownership more attainable for Canadians in these high-priced regions, offering more flexibility to those who may not have larger down payments available.

The move also reflects broader concerns over housing affordability, as prices have outpaced income growth in many parts of the country. This adjustment will hopefully ease some pressure on potential buyers, particularly those entering the market for the first time. However, it remains to be seen whether this change will lead to more upward pressure on housing prices as demand increases.

Why OSFI Made the Change to the Stress Test

OSFI’s decision to remove the stress test requirement for homeowners renewing their mortgages with a new lender is rooted in the regulator’s desire to foster competition and flexibility in the mortgage market. When the stress test was first introduced, it was designed to ensure that borrowers could handle increases in interest rates, which added a layer of financial protection. However, during mortgage renewals, homeowners have already demonstrated their ability to manage their mortgage payments, and reapplying the stress test may limit their ability to seek better offers.

By removing this obstacle, OSFI encourages borrowers to shop around for the best mortgage rates, increasing competition between lenders. This change is particularly important at a time when interest rates have been fluctuating, and homeowners are seeking the best possible deals to manage their mortgage payments.

Comparing Both Announcements: A Dual Approach to Housing Affordability

The federal government and OSFI’s recent announcements represent two distinct yet complementary approaches to tackling housing affordability and market flexibility in Canada. The federal government’s policy aims to increase accessibility for first-time homebuyers in expensive markets by raising the insured mortgage cap, allowing buyers to enter the market with smaller down payments. This is particularly helpful in cities where housing prices have soared beyond the $1 million mark, such as Vancouver and Toronto.

On the other hand, OSFI’s removal of the stress test for mortgage renewals supports existing homeowners by offering them more flexibility and freedom when renewing their mortgages. By encouraging borrowers to shop for the best rates without the additional burden of the stress test, OSFI hopes to foster a more competitive mortgage landscape. Together, these two changes address both the need for new buyers to access the market and the need for current homeowners to find better financial solutions.

Geographic Impact: Big Cities vs. Smaller Markets

The impact of these mortgage rule changes will vary greatly depending on geographic location. In larger urban centres like Toronto, Vancouver, and Montreal, the raised insured mortgage cap is expected to benefit first-time homebuyers who were previously priced out of the market. Homes in these cities often exceed the previous $1 million limit, so the increase to $1.5 million should provide more opportunities for those trying to enter these high-demand markets.

In contrast, the changes may have less immediate impact in smaller cities and rural areas where average home prices are below $1 million. Buyers in these regions may not need to rely as heavily on insured mortgages or the new cap increase. However, the removal of the stress test for mortgage renewals could still be beneficial across the board, offering homeowners nationwide the ability to shop around for better mortgage rates without extra financial hurdles.

Market Reactions and Expert Opinions

Initial reactions to the federal government and OSFI’s mortgage policy changes have been largely positive, though some experts caution that these updates may have unintended consequences. Real estate professionals, including mortgage brokers and Realtors, generally welcome the increase in the insured mortgage cap, noting that it helps first-time homebuyers access a broader range of homes in high-cost cities. For instance, in markets like Vancouver and Toronto, where real estate prices continue to surge, this change is seen as a way to provide more housing options without requiring larger down payments.

However, some financial analysts warn that raising the insured mortgage cap could potentially drive housing prices even higher. With more buyers able to access larger loans, competition for homes could increase, pushing prices up in already expensive markets. On the OSFI side, many experts agree that the removal of the stress test for mortgage renewals should help borrowers save money and increase lender competition, but some caution that it’s essential for homeowners to remain financially prudent when switching lenders.

Public Reaction: What Do Home Buyers Think?

From the perspective of homebuyers and homeowners, these changes are generally seen as positive steps toward improving access to affordable housing and reducing the financial strain of renewing a mortgage. First-time buyers in major cities, especially those who have been struggling with housing affordability, view the federal government’s increase to the insured mortgage cap as a welcome change. It allows them to consider more homes in their price range without needing a 20% down payment.

Homeowners approaching mortgage renewal also appreciate OSFI’s decision to remove the stress test when switching lenders. Many borrowers are now exploring options to secure better mortgage rates without being subjected to the stress test, a move that could lead to significant savings over the term of their mortgage.

What’s Next for Canadian Mortgage Policy?

With these recent changes, many are wondering what additional steps the federal government and OSFI might take to address housing affordability and mortgage regulations in the future. The Canadian housing market remains a hot topic, particularly in urban areas where prices are skyrocketing. Some experts speculate that we could see further adjustments to mortgage lending rules, such as additional support for low-income buyers or incentives for building affordable housing.

As inflation and interest rates continue to fluctuate, it’s likely that policymakers will remain focused on striking a balance between ensuring financial stability and promoting homeownership. The removal of the stress test for mortgage renewals and the increase in the insured mortgage cap may just be the beginning of a broader effort to make homeownership more accessible to Canadians, especially as economic conditions evolve.

Conclusion

The recent changes to Canada’s mortgage rules—raising the insured mortgage cap to $1.5 million for first-time homebuyers and removing the stress test for renewals—are designed to address key issues in the housing market. While these updates aim to make homeownership more accessible and promote competition among lenders, buyers and homeowners must remain financially savvy and ensure they are borrowing within their means.

For first-time homebuyers, the raised mortgage cap opens up new possibilities in competitive markets, while for renewing homeowners, the removal of the stress test creates more flexibility to find the best rates. As these changes take effect, it will be crucial to monitor how they influence home prices and affordability in both large cities and smaller markets across Canada.

Quickly stay updated on the real estate market with Real Estate Recap’s 15-second summaries.