Canada’s banking regulator today unveiled proposed changes to the capital requirements that would impact the country’s lenders and mortgage insurers.

The Office of the Superintendent of Financial Institutions (OSFI) initiated a consultation period for feedback on its proposed changes to the Capital Adequacy Requirements (CAR) and Mortgage Insurer Capital Adequacy Test (MICAT) guidelines.

The changes aim to address what OSFI says are growing risks associated with mortgages in negative amortization, meaning borrowers with fixed-payment variable-rate mortgages whose monthly payments are no longer covering the interest portion of their payment.

“We have proposed capital requirements to ensure banks and mortgage insurers have adequate capital buffers to absorb risks that arise when mortgages fall into negative amortization,” OSFI head Peter Routledge said in a statement. “We believe these incremental changes add necessary resilience to Canada’s mortgage finance system.”

The new capital requirement proposals come less than a month after OSFI announced an increase to its Domestic Stability Buffer, which increased the amount of capital federally regulated banks must keep on hand to cover potential future losses.

What the proposed changes entail

Under the proposed guidelines, lenders will be required to hold more capital that aligns with the increased risk of mortgages in negative amortization with a loan-to-value ratio (LTV) above 65%. This means that the outstanding balance of the mortgage must be 65% or more of the value of the collateral. The objective is to incentivize banks to reduce the number of mortgages that would otherwise enter negative amortization.

For mortgage insurers, the proposed changes include increasing the maximum LTV ratio for individual mortgages in the MICAT capital formula from 100% to 105%. This adjustment aligns the MICAT capital formula with the maximum permitted LTV ratio for insured mortgages.

“For consumers who have a current mortgage term, these changes will not lead to an increase in monthly payments,” OSFI said in its release.

OSFI added that its primary goal with these proposed amendments is to “make sure banks and mortgage insurers are managing risks effectively.”

Anyone interested can submit their comments on the proposed changes to Consultations@osfi-bsif.gc.ca by September 1, 2023.