Canada’s top banking regulator will begin tracking and limiting how many highly leveraged borrowers banks have on their mortgage books beginning next year.

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OSFI confirms new limits on banks' mortgages to highly indebted borrowers Back to video

The Office of the Superintendent of Financial Institutions (OSFI) said its new test will not apply to individual borrowers, but to each bank’s overall mortgage portfolio.

It will monitor quarterly loan-to-income ratios to ensure the percentage of a bank’s uninsured mortgage loans that is in excess of 4.5 times borrower income stays below a specified threshold.

The regulator characterized the new measure as a “backstop” to the existing mortgage stress test that assesses an individual borrower’s capacity to manage payments if interest rates rise.

High-leverage debt in bank mortgage portfolios, in particular, comes with debt-serviceability risks the regulator is trying to mitigate.

The new portfolio measure is aimed at mitigating a perceived “vulnerability” in the financial system, but OSFI initially intended to set a uniform cap on high loan-to-income loans across all lenders. Following industry feedback, however, the regulator opted to look at each financial institution individually, taking into account different risk appetites and ensuring the new measure did not interfere with competition. 

“Whereas this 4.5x multiple will be common across all institutions, the portion of the new bookings that will be allowed to exceed this multiple will be unique to each institution and its bespoke competitive model,” the regulator said in a statement on Friday. “This approach will allow institutions to continue competing on a relative basis as they have done in the past.”

The new measure will take effect in the first fiscal quarter of 2025. Once implemented, OSFI expects quarterly compliance reporting.

To prevent the buildup of leverage by breaking loans into smaller components across different financial institutions, OSFI said all loans secured against a property must be taken into account when calculating the loan-to-income ratio, including first and second mortgages and lines of credit secured against a home’s equity line of credit. However, insured loans and renewals will be excluded.

The new portfolio test will apply regardless of the intended use of the property, such as whether it will be an owner-occupied or an investment property. 

• Email: bshecter@postmedia.com

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