Federal government creates mortgage stress test relief for struggling homeowners

Mortgage and household debt. (Shutterstock)

The growing size of monthly debt financing payments due to the Bank of Canada’s heightened policy interest rates is becoming an unmanageable burden for many Canadian households, especially for those who bought their home early in the pandemic when financing costs were low.

A recent Angus Reid survey shows the number of Canadians struggling to pay their mortgage has doubled since March, while another report by RBC Capital Markets warns about 60% of outstanding mortgages at Canada’s major banks will be due and up for renewal within the next three years, with homeowners facing a potentially significant “payment shock” upon renewal.

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With these challenges in the forecast, the federal government announced today it will be establishing a new “Canadian Mortgage Charter” that outlines how financial institutions are expected to work with mortgage holders, including the provision of relief and to ensure payments are reasonable.

“The Canadian Mortgage Charter details the tailored mortgage relief that Canadians at risk can expect from their banks if they are in financial difficulty,” said Deputy Prime Minister and Finance Minister Chrystia Freeland in her fall economic statement today.

“Our goal is to help Canadians through an incredibly challenging time — by making sure Canadians at risk have the support they need to afford their mortgages and keep their homes when renewing at a time of higher interest rates. And we are committed to taking further action if necessary.”

Under the charter, Canadians will be provided guidance to look for better mortgage rates as they renew their loans within the challenging marketplace.

One of the major components of the charter is to not require insured mortgage holders to requalify under the insured minimum qualifying rate when switching lenders at mortgage renewal. This means such mortgage holders do not have the pass the stress test again with the existing financial institution, with the stress test only required if they are looking to change to another institution. Currently, many mortgage holders have limited or no other options due to the existing need to requalify and pass the stress test before moving to a different lender.

Other components of the charter include allowing temporary extensions of the amortization period for mortgage holders at risk, waiving fees and costs that would have otherwise been charged for relief measures, and contacting homeowners four to six months in advance of their mortgage renewal to inform them of their renewal options.

Additionally, the charter will also give homeowners at risk the ability to make lump sum payments to avoid negative amortization or sell their principal residence without any prepayment penalties. As well, interest will not be charged on interest in the scenario that mortgage relief measures result in a temporary period of negative amortization.

In her update, Freeland also announced additional billions of dollars in funding and low-cost financing to help catalyze new rental homes and affordable homes across the country, and new federal measures to tackle illegal short-term rental homes.

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