Canada’s banking regulator has unveiled three new regulatory proposals that could further restrict mortgage lending pending a newly-launched consultation period.
The Office of the Superintendent of Financial Institutions (OSFI) announced the proposals Thursday in response to what it says are building risks in Canada’s residential mortgage market.
“Unprecedented house price increases have been accompanied by record levels of household indebtedness, of which residential mortgages account for a large share,” OSFI said in its consultation document. “Federally regulated financial institution (FRFI) lenders, which hold approximately 80% of all residential mortgages in Canada, are exposed to heightened risks from this indebtedness.”
OSFI’s three proposals include:
- Loan-to-income (LTI) and debt-to-income (DTI) restrictions
This would involve measures that restrict mortgage debt or total indebtedness as a multiple or percentage of borrower income.
Federally regulated financial institutions current don’t have prescribed LTI or DTI limits, however OSFI notes an LTI of 450% is typically considered “high” and has been on the rise since the start of the pandemic.
OSFI is therefore proposing a “lender-level” limit that would restrict lenders to a certain volume of loans that exceed a “prudent” threshold.
“Imposing such limits may also reduce the potential for policy leakage and migration of lending activity to the unregulated lending sphere,” OSFI says.
- Debt service coverage restrictions
This would involve measures that restrict ongoing debt service (principal, interest and other related expenses) obligations as a percentage of borrower income.
Lenders must employ Gross Debt Service (GDS) and Total Debt Service (TDS) limits on insured mortgages (those with a down payment of less than 20%), which are currently 39% and 44%, respectively.
However, this doesn’t apply to uninsured mortgages, but that’s now being considered by OSFI, including the implementation of graduated or tiered limits.
Additionally, OSFI said it could limit lenders to a certain volume of loans with high debt-service ratios.
- Interest rate affordability stress tests
The final proposal could see OSFI adopt more “risk-sensitive” tests of affordability beyond the current Minimum Qualifying Rate (currently 5.25%) used in the existing mortgage stress tests.
OSFI suggested lenders could be asked to implement varying MQRs based on different risk characteristics and product types, such as different mortgage terms.
Despite its concerns about risk in the market, OSFI head Peter Routledge told the Globe and Mail that borrowers are currently in good shape, and that these proposed changes are about ensuring it stays that way.
“Debt serviceability is among the strongest it’s ever been,” he was quoted as saying. “99.86 per cent of Canadians are current on their mortgages,” an all-time low arrears rate.
“We’d like to keep that going,” he added, but acknowledged delinquencies are expected to “deteriorate a little bit from here.”
Consultation period
None of the proposed changes will be finalized until after OSFI’s consultation period, which is now open until April 14, 2023.
“Sound mortgage underwriting remains the cornerstone of a healthy residential mortgage lending industry,” said OSFI’s assistant superintendent, Tolga Yalkin. “We look forward to stakeholder views on how different debt serviceability measures can support this important policy objective.”
OSFI said it may choose to pursue “one or more of these measures or others that meet OSFI’s prudential policy objectives.”
b-20 guideline B-20 Office of the Superintendent of Financial Institutions OSFI OSFI changes OSFI rules Peter Routledge regulations restrictions
Last modified: January 12, 2023
So if it ain’t broke, fix it??
I think we’re doing pretty well due to the existing stress test. Canada is just going to become a nanny state of this keeps going. At the end of the day, people have to take responsibility for their debt. If they dont, they bear the consequences. There are people who make hundreds of thousands per year and debt service at 20% but aren’t able to save a penny because theyre financially irresponsible. Leave some responsibility on the homeowner.
Not surprised actually. The Banks that rule the country are complaining that the order of buz is affecting their pocketbooks. They hold their borrowers as hostages as the BOC sees to it. With a delinquency ratio of 0.16% and they want to…. fix it? While as a recovering banker with that sort of delinquency ratio, I would have been fired for being too strict. Ha ha.
Really. What they really need to fix is the rules between the banks and the actual rules. The banks are not following the B20 AND B21 rules. The banks are coddling their Variable rate mortgage holders by extending their amorts, some up to 70 years, but the monoline clients are sucking it up and paying. Two standards again as per usual.Offering insurable rates to refinances and blowing by rules that Brokers couldn’t come near. Also when a client is offered a crappy renewal rate they cant transfer because of the B20 and B21 guidelines that Brokers have to follow but again they need to requalify to transfer and the banks know this and stick it to their clients that clearly won’t.
The banks clearly trying to strong-arm the market again while Brokers toe the line and are held to these strict guidelines which the banks clearly do not follow. But yeah let’s kick some more dirt on the brokers and the borrowers cause we need to be better regulated.
You can say that I am bitter or disgruntled but you know I am telling the truth.
Regulating the B side of business is a Nanny state and it’s simply too much.