Canada’s bank regulator is getting ahead of any rate cuts with new limits on leverage. The Office of the Superintendent of Financial Institutions (OSFI) has notified lenders to prepare for a new loan to income (LTI) rule. The new rule will limit federally regulated financial institutions (FRFIs) mortgage portfolios to a multiple of the income used to service those loans. The regulator says the new limits are designed to help limit a buildup of risky leverage during low interest rate periods .
Canadian Banks To Limit Mortgage Leverage Before Rate Cuts
Canadian mortgage lenders are preparing for new limits to mortgage lending. Mortgage portfolios will soon be limited to 4.5x borrower income in a quarter. Only a small share will be allowed to exceed the limit, designed to reduce portfolio risk.
“The LTI measure we are implementing is a portfolio test that is designed to prevent the buildup of highly leveraged loans during low interest rate periods,” explained a spokesperson for OSFI.
OSFI Is Eliminating Excess Leverage, Not Over-leveraged Borrowers
Generally speaking, a borrower is considered “over-leveraged” when their loan exceeds 450% of income. This has led to some confusion after a piece titled “Canada’s banking regulator OSFI to cap mortgages to highly indebted borrowers” broke the news.
However, it’s important to note that OSFI’s role is to ensure a functioning financial system. It’s not to protect individuals from risk or tell FRFIs which clients are too risky. “This measure doesn’t apply to any one person,” explains OSFI.
“It applies to the institution’s portfolio of underwritten mortgages that originate that quarter and needs to be managed by the institutions.”
Institutions are just being asked to balance their risk. Every risk taken by the lender needs to be balanced to avoid any catastrophic concentration of vulnerability.
“This institution specific portfolio limit will not bind any one institution’s underwriting method, under the current rate environment. This approach allows institutions to continue competing in the same way they have been in the past on a relative basis.”
The new rule is one of the many being rolled out to reduce public exposure to private debt. Since the global financial crisis, global regulators have been working together to better quantify risk. This has led to tighter lending, especially when it comes to investors.
Good on OSFI. Only way to mitigate the gov stimulus mortgage buying. It sucks the gov needs non-political regulators to offset their insane decisions.
Gov is overstepping (again). Let the free market do it’s job.
they aren’t. They’re trying to balance the decisions of gov injecting stimulus. Canada is at the point where even global capital doesn’t want to deal with our insanity.
free market in Canada, lollllllllllllllllll
300 per cent of income would be more appropriate
Pretty sure if they did this new mortgages would be limited to 1 x income for a couple years to balance the crazy leverage multiples of existing mortgages
Fraudulent mortgages and interest rates for investment properties have to be dealt with as well. Fake income is submitted to buy housing at inflated prices and then renting it out for 10 – 20 students or residents at a time. This helps them make additional income on top of covering the mortgage payments as well as make a premium when they flip the house. Any mortgage outside of a primary residence has to be underwritten as a commercial loan with commercial interest rates.
How many different ways do we have to manage or measure this, TDSR, already had this covered. More wasteful ways to employ public servants on our dime.
how will anyone qualify for a mortgage now as the average canadian house is a ridiculous 14x the average income… I don’t deny there could be benefits but only after we deal with the existence of landlords. The only thing the “inventors” of capitalism and marxism agreed on was landlords being a sickness to the economy
I suppose this doesn’t apply to mortgage renewals as long as the principal is not increased. But what if you want to transfer your mortgage to another bank to get a more competitive rate?
This is going to be a problem for retirees or seniors that still have a mortgage. Will the banks still only consider 50% of rental income towards gross income calculations? Some definite problems here.
This limit is related to the lender’s/bank’s/CU’s total mortgage portfolio, not a specific borrower’s personal mortgage.