Canada's banking regulator annouces a cap on the number of residential mortgages that banks can write to highly indebted borrowers, starting in 2025.Sean Kilpatrick/The Canadian Press
In an attempt to get ahead of potential Bank of Canada rate cuts in the coming months, Canada’s banking regulator is placing a cap on the number of residential mortgages that banks can provide to highly indebted borrowers.
Canada’s banking regulator OSFI to cap mortgages to highly indebted borrowers
The Office of the Superintendent of Financial Institutions (OSFI) has told lenders in Canada that they will have to limit the number of borrowers who can get a mortgage that is greater than 4.5 times their annual income.
Here’s what you need to know.
What is the new rule and how will it work?
The new rule, set to take effect in the first quarter of 2025, limits the number of mortgages a bank can issue that are larger than 4.5 times a borrower’s annual income. The loan-to-income (LTI) ratio compares the size of the homebuyer’s mortgage to their gross income.
The rule will only apply to new mortgages, not existing loans or loans that come up for renewal.
Banks currently do not have a limit on the number of high LTI loans they can have on their books. But under the new rule, OSFI will assess each bank’s loans above the 4.5-times threshold on a quarterly basis. The cap will be based on the number of individual loans, not the outstanding loan amount.
Banks will be allowed to exceed this new LTI ratio for some clients, creating a scope of relief for borrowers in expensive cities. Each bank will have a different cap, which will depend on the markets they serve. For example, prospective buyers in Toronto and Vancouver often have to borrow more than 4.5 times their income to buy a property.
Will this new rule be applied similarly to the mortgage stress test?
The rule will be applied differently from the mortgage stress test, according to OSFI. While the stress test is applied to the borrower, the new rule applies to banks’ residential mortgage portfolios and is not a specific limit for borrowers. Lenders will be required to limit the percentage of mortgages that exceed an LTI ratio of 450 per cent.
Why is this happening now?
The move comes amid a jump in highly leveraged loans and rising prices. The cap is designed to prevent the buildup of those highly leveraged loans, particularly once mortgage rates start to come down and it becomes easier to qualify for larger loans.
There is concern that borrowers who take out mortgages greater than 4.5 times their annual incomes are more likely to default on their loan payments if they lose their jobs or are suddenly required to pay higher interest rates.
In January, 2023, OSFI floated a plan to specifically limit highly leveraged loans. At the time, the regulator contemplated a cap of 25 per cent of a lender’s new loans every quarter, but no further details were announced.
What will be the impact of the new OSFI policy?
The new rule will make it even harder for some borrowers to get a mortgage large enough to purchase a property, even though it is already difficult to qualify for a mortgage because of the federal stress test and higher interest rates.
Prospective homebuyers will start to feel the impact next year and will likely have fewer options as mortgage rules are strengthened.
“It is going to limit borrower options, especially for bigger-ticket items,” said Don Scott, the chief executive officer of Frank Mortgage, which brokers residential loans and works with about 20 lenders. Mr. Scott said this could push more borrowers to private lenders, which are not as heavily regulated as banks and do not have to administer the mortgage stress test, though those lenders charge higher interest rates.
Meanwhile, the Canadian Bankers Association said the industry is still assessing the impact of the new policy.
“Banks in Canada have a long history of working with their customers to keep their mortgages in good standing. Understanding their customers and adapting to their changing circumstances is a top priority,” CBA spokesperson Maggie Cheung said in an e-mailed statement to The Globe and Mail.
With reports from James Bradshaw, Rachelle Younglai and Stefanie Marotta