Canadian regulator cracks down on high-debt mortgages to protect borrowers
The Office of the Superintendent of Financial Institutions (OSFI) has introduced new restrictions on how much debt federally regulated banks can extend through uninsured mortgages.
With the goal of reducing borrower risk, the banking regulator will set loan-to-income (LTI) limits on the portfolios of federally regulated financial institutions for new uninsured mortgage loans.
While the LTI limits will not apply to individual borrowers, banks will be restricted in the number of new mortgages they can issue that exceeds 4.5 times a borrower’s income. However, OSFI will set tailored limits for each bank on the percentage of new loans that can surpass this threshold.
Loans that fall under this new regulation include first and second mortgages, home equity lines of credit (HELOCs), and other related borrowing vehicles, regardless of whether they are held by the same or different institutions. Insured loans and renewals, however, are expected to be excluded from this measure.
The agency said the limit would serve as a backstop to the Minimum Qualifying Rate (MQR), also known as the mortgage stress test. It restricts high levels of household debt across each institution’s uninsured mortgage loan portfolio, particularly during periods of low-interest rates.
“This measure is designed not only to curb excessive borrowing in an era of rising interest rates but also to align with institutions’ competitive strategies, allowing them to operate effectively within their market segments,” the OSFI said in a Press release.
The LTI cap will allow institutions to maintain their relative competitive positions in the industry rather than imposing a uniform, one-size-fits-all restriction.
“This approach will allow institutions to continue competing on a relative basis as they have done in the past,” the regulator stated.
The LTI limit is expected to take effect at each financial institution’s fiscal first quarter of 2025, with OSFI requiring quarterly compliance reporting once implemented.
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OSFI noted that high household debt is still relevant to credit risk, the safety and soundness of federally regulated financial institutions, and the overall stability of the Canadian financial system. The new LTI framework is intended to prevent a similar buildup of highly leveraged mortgages on banks’ books in the future.
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