Amid concerns over soaring residential prices and escalating borrower indebtedness, Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), is taking steps to limit the proliferation of highly leveraged loans within banks’ residential mortgage portfolios.
These loans, which have expanded alongside rising property values, have contributed to Canadian borrowers ranking among the most highly indebted globally.
According to sources familiar with the matter, OSFI has instructed lenders to restrict the number of mortgages exceeding 4.5 times the borrower’s annual income.
This new income limit supplements existing mortgage qualification regulations, including the federal stress test, which mandates borrowers to demonstrate the ability to repay mortgages under conditions of higher interest rates.
While banks may exceed the 4.5 times income ratio for select clients, they will face caps on mortgage loans exceeding this threshold, known as a loan-to-income (LTI) ratio of 450 percent.
Balancing Risk and Borrower Relief
The imposition of limits on highly leveraged loans underscores efforts to mitigate systemic risk within Canada’s housing market while addressing affordability challenges faced by borrowers, particularly in major cities like Toronto and Vancouver.
By curbing the issuance of mortgages exceeding 4.5 times income, regulators aim to temper excessive borrowing and promote financial stability in the face of mounting household debt levels.
Despite the regulatory intervention, there remains flexibility for lenders to accommodate borrowers in high-cost urban centers, where property prices often surpass national averages.
However, these allowances will be strictly controlled to prevent excessive exposure and ensure prudent lending practices.
The move reflects a delicate balance between supporting housing affordability and safeguarding against systemic financial risks in Canada’s dynamic real estate sector.
