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OSFI proposes new mortgage restrictions

Canada’s banking regulator has unveiled three new regulatory proposals that could further restrict mortgage lending pending a just-launched consultation period.

Proposed OSFI regulations

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.”

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Last modified: January 12, 2023

Steve Huebl is a graduate of Ryerson University's School of Journalism and has been with Canadian Mortgage Trends and reporting on the mortgage industry since 2009. His past work experience includes The Toronto Star, The Calgary Herald, the Sarnia Observer and Canadian Economic Press. Born and raised in Toronto, he now calls Montreal home.