Canada regulator to cap number of mortgages to highly indebted borrowers

© Reuters. Houses are seen under construction in a neighbourhood of Ottawa, Ontario, Canada April 17, 2023. REUTERS/Lars Hagberg

OTTAWA/TORONTO (Reuters) -Canada’s banking regulator on Friday said lenders will have to limit the number of mortgage borrowers with highly leveraged loans in their portfolios as Canadians grapple with the burden of huge debt in a challenging economic environment.

In an emailed statement, the Office of the Superintendent of Financial Institutions (OSFI) said it is implementing a cap on the number of mortgages a bank can lend that are larger than 4.5 times a borrower’s annual income.

The loan-to-income, or LTI, measure applies to individual banks and is designed to prevent the buildup of highly leveraged loans during low interest rate periods, OSFI said.

The banks will have to monitor and manage their portfolio of underwritten mortgages every quarter, it added.

OSFI said it had considered banks’ business models and that the portfolio limit, specific to each institution, would not bind any one bank’s underwriting method.

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

The Globe and Mail, which first reported the news, said the new income limit is expected to take effect in the first quarter of next year, adding it would not apply to insured loans in which the borrower has to pay for mortgage insurance because their down payment is less than 20% of the property’s purchase price.

The banking regulator has already introduced new rules including a minimum qualifying rate that is 2% higher than the borrower’s agreed mortgage rate to ensure consumers can withstand future interest rate changes.

Canada’s big banks have also set aside more funds to cover loans that could potentially turn sour since the central bank began raising interest rates and the regulator has required to banks to show a strong capital position.

“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.”