Canada regulator: Canada’s banking regulator announced on Friday that lenders will be required to limit the number of mortgage borrowers with highly leveraged loans in response to the notable debt burden faced by Canadians amid a challenging economic climate.
The Office of the Superintendent of Financial Institutions (OSFI) revealed in an emailed statement that it will enforce a cap on the number of mortgages a bank can issue that exceed 4.5 times a borrower’s annual income.
This loan-to-income (LTI) measure aims to curb the accumulation of highly leveraged loans during periods of low interest rates, with individual banks tasked with monitoring and managing their portfolios of underwritten mortgages on a quarterly basis, as per OSFI’s directive.
OSFI stressed that it considered the diverse business models of banks and that the portfolio limit, tailored to each institution, would not impede any bank’s underwriting method.
The new income limit, as reported by The Globe and Mail, is anticipated to take effect in the first quarter of the following year.
However, it will not be applicable to insured loans, where borrowers are required to pay for mortgage insurance due to a down payment of less than 20 per cent of the property’s purchase price.
In addition to this measure, the banking regulator has previously introduced rules such as a minimum qualifying rate set 2 per cent higher than the borrower’s agreed mortgage rate to ensure consumers can withstand potential interest rate fluctuations.
Amidst rising interest rates, Canada’s major banks have bolstered reserves to cover loans that could face default, while regulators have mandated banks to maintain a robust capital position.
The Canadian Bankers Association, a prominent lobbying group, underscored the industry’s commitment to assisting customers in maintaining their mortgages in good standing, stressing their dedication to understanding and adapting to changing customer circumstances.
The association also noted that the industry is currently evaluating the impact of OSFI’s policy.
(With Reuters Inputs)
