Canada’s Banking Regulator Imposes Limits on Highly Leveraged Mortgage Loans
Canada’s banking regulator announced on Friday that lenders will be required to restrict the number of mortgage borrowers with highly leveraged loans in their portfolios, as Canadians struggle with significant debt burdens amid a challenging economic climate.
In a statement sent via email, the Office of the Superintendent of Financial Institutions (OSFI) stated that it will enforce a cap on the quantity of mortgages a bank can extend that exceed 4.5 times a borrower’s annual income.
The loan-to-income (LTI) measure is applicable to individual banks and is aimed at averting the accumulation of highly leveraged loans during periods of low interest rates, according to OSFI.
ALSO READ: Chinese Banks Launch Innovative Loans Backed by Data Assets
Furthermore, banks will need to regularly monitor and manage their portfolio of underwritten mortgages every quarter, as per the directive.
OSFI emphasized that it had taken into account the business models of banks, clarifying that the portfolio limit, tailored to each institution, would not constrain any one 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 said.
The initial report by The Globe and Mail indicated that the anticipated income restriction will come into effect in the first quarter of the following year. It was noted that this restriction would not be applicable to insured loans, where borrowers are required to pay for mortgage insurance due to their down payment being less than 20% of the property’s purchase price.
The banking regulator has previously implemented new regulations, including a minimum qualifying rate set 2% higher than the borrower’s agreed mortgage rate, to ensure consumers can handle potential interest rate fluctuations.
Additionally, Canada’s major banks have increased their reserves to cover loans that may default, particularly since the central bank commenced raising interest rates. The regulator has mandated banks to maintain a robust capital position to mitigate risks effectively.
“Banks in Canada have a long history of working with their customers to keep their mortgages in good standing,” Canadian Bankers Association, a top lobbying group said.
“Understanding their customers and adapting to their changing circumstances is a top priority. The industry is still assessing the impact of OSFI’s policy.”
