The federal government’s Fall Economic Statement included a new Canadian Mortgage Charter. The Charter is meant to alleviate concerns from the estimated 2.2 million households who will be renewing their mortgages over the next two years. These mortgages were negotiated when mortgage rates were substantially lower, and so many borrowers will see rate increases between 2% to 3.5%. The mortgage stress test has been in place since January 2018, so all these loans were stress-tested to their current rate plus 2%.

However, since wages have not kept pace with the higher cost of living, increased monthly payments will strain many people’s budgets The chart shows the impact of an interest rate increase on a mortgage of $400,000 – a loan that was originally negotiated with a rate of 2% would cost 45% more if the interest rate increased to 5.5%.

The Canadian Mortgage Charter doesn’t introduce anything new to address this issue. Instead, it brings together existing advice and recommendations from financial regulators. For example, the first point is that Canadians can expect financial institutions to allow temporary extensions of their amortization periods, a practice that is already widespread. Three points address waiving fees or additional costs in certain situations. Another point suggests that homeowners should expect to be contacted four to six months in advance of their mortgage renewal. This is a standard practice for Canada’s larger banks, but not a mandatory requirement for all financial institutions. It’s unclear how these points in the charter will be enforced since the federal government said they do not intend to introduce any new legislation.

The most controversial point in the charter deals with when those renewing mortgages need to meet the stress test. The stress test means that borrowers must be able to qualify for a mortgage with an interest rate 2 percentage points higher than the one that they are being offered. Originally, lenders believed that everyone who switched lenders when their mortgage was up for renewal would need to pass the stress test. But on October 16th, the Office of the Superintendent of Financial Institutions (OSFI), issued a statement saying that insured borrowers were exempt from being stress-tested when switching lenders, provided that the loan amount and amortization period didn’t change. This statement has been repeated as one of the points in the Canadian Mortgage Charter.

Mortgages must be insured by the Canadian Mortgage and Housing Corporation (CMHC) when the homeowner has less than 20% equity in the property. This insurance makes the mortgage lower risk for banks and other financial institutions, so insured mortgages often have lower interest rates than uninsured mortgages. Over one million mortgages are coming up for renewal in 2024, and most of these mortgages are uninsured. This ruling by OSFI will lock many homeowners into renewing their mortgages with their existing financial institutions, who will be able to charge higher rates because of the lack of competition.