Canadian Regulator Sets Limit on Mortgages for Highly Indebted Borrowers

Canada’s banking regulator announced on Friday that lenders will be required to impose restrictions on the number of mortgage borrowers holding highly leveraged loans, reflecting Canadians’ struggles with substantial debt amidst a challenging economic landscape.

In an official statement delivered via email, the Office of the Superintendent of Financial Institutions (OSFI) disclosed its intention to enforce a ceiling on the number of mortgages a bank can extend, stipulating that they exceed 4.5 times a borrower’s annual income.

“The loan-to-income, or LTI, measure is tailored to individual banks, aiming to mitigate the accumulation of highly leveraged loans particularly in periods of low interest rates,” OSFI stated.

As outlined by the regulatory body, banks are mandated to conduct quarterly assessments and actively manage their portfolio of underwritten mortgages.

Canadian Regulator Sets Limit on Mortgages for Highly Indebted Borrowers
OSFI introduces a cap on mortgages exceeding 4.5 times a borrower’s income to curb risky lending practices.

In formulating this directive, OSFI clarified that it took into account the various business models of banks. Moreover, the imposed portfolio limit, unique to each institution, is intended not to restrict any single bank’s underwriting approach.

“This approach allows institutions to continue competing in the same way they have been in the past on a relative basis,” it asserted.

According to The Globe and Mail, which initially broke the story, the anticipated implementation of the new income threshold is slated for the first quarter of the upcoming year.

The report clarified that this regulation would not apply to insured loans, where borrowers are obliged to purchase mortgage insurance due to their down payment being less than 20% of the property’s purchase price.

On the market front, the Dow experienced a decline of 3/4 of a percent, while the S&P registered a dip of more than 1/10 of a percent. Conversely, the NASDAQ exhibited a slight increase of more than a 10th, contributing to the upward trajectory of the S&P throughout the week.

Canadian Regulator Sets Limit on Mortgages for Highly Indebted Borrowers
The market responds cautiously as the Federal Reserve signals commitment to three interest rate cuts despite economic uncertainties.

This was in response to an indication from the Federal Reserve, which affirmed during its policy meeting on Wednesday that it remains committed to executing three interest rate cuts within the year.

The banking regulatory authority has previously introduced new regulations, including a minimum qualifying rate set at 2% higher than the borrower’s agreed mortgage rate, aimed at ensuring consumers can weather potential fluctuations in interest rates.

Since the central bank initiated interest rate hikes and the regulatory authority mandated banks to demonstrate robust capital positions, Canada’s major banks have bolstered their reserves to cover loans susceptible to default.

“Banks in Canada have a long history of working with their customers to keep their mortgages in good standing,” remarked the Canadian Bankers Association, a prominent advocacy group.

“Understanding their customers and adapting to their changing circumstances is a top priority. The industry is still assessing the impact of OSFI’s policy.”
Michael Manua
Michael Manua
Michael, a seasoned market news expert with 29 years of experience, offers unparalleled insights into financial markets. At 61, he has a track record of providing accurate, impactful analyses, making him a trusted voice in financial journalism.
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