OSFI implements cap on high-ratio mortgages in Canada 

On Friday, Canada’s banking regulator said that lenders will keep restricting the number of mortgage borrowers with highly leveraged loans in their portfolios as Canadians wrestle with massive debt in a challenging financial environment.

The Office of the Superintendent of Financial Institutions (OSFI) has announced a new measure to regulate the mortgage market, aiming to curb the issuance of highly leveraged loans. In an emailed statement, OSFI revealed its plan to enforce a cap on the number of mortgages that exceed 4.5 times a borrower’s annual income.

Objective of the Measure:

The loan-to-income (LTI) measure targets individual banks and seeks to mitigate the accumulation of highly leveraged loans, especially during periods of low interest rates. By limiting the number of mortgages based on borrowers’ income multiples, OSFI aims to enhance financial stability and reduce the risk of defaults.

Monitoring and Management:

Under the new regulation, banks are required to actively monitor and manage their portfolio of mortgages on a quarterly basis. This proactive approach enables banks to assess and adjust their lending practices to comply with the imposed cap.

Consideration of Business Models:

OSFI emphasized that the portfolio limit is tailored to each institution, considering their unique business models. This flexible approach ensures that the regulation does not hinder banks’ ability to compete effectively in the mortgage market.

Implementation Timeline:

While the specific details of the regulation are yet to be disclosed, it is expected to come into effect in the first quarter of the following year. 

However, it’s worth noting that the income limit will not apply to insured loans, where borrowers are required to pay for mortgage insurance due to a down payment of less than 20% of the property’s purchase price.

Overall Regulatory Environment:

This announcement follows previous regulatory measures introduced by OSFI, including a minimum qualifying rate requirement that is 2% higher than the borrower’s agreed mortgage rate. 

Additionally, Canada’s major banks have bolstered their capital reserves in response to rising interest rates and regulatory demands, ensuring a robust financial position in the face of potential economic challenges.