OSFI’s upcoming loan-to-income limit

We will be implementing a loan-to-income (LTI) limit on the portfolios of federally regulated financial institutions for new uninsured mortgage loans.

The LTI limit will be a simple supervisory measure that will restrict high levels of household debt across each institution’s uninsured mortgage loan portfolio.

• It will serve as a backstop to the Minimum Qualifying Rate (MQR), such as in periods of low interest rates.
• It won’t apply to individual borrowers.
• It will help us advance our mandate of protecting the rights and interests of depositors, policyholders and financial institution creditors.

What we heard

We published a consultative document in January 2023, to seek feedback on mortgage lending risks, in particular debt serviceability. We published the summary of this feedback and our responses in October 2023.

We noted that we regard LTI and Debt-to-income (DTI) as simpler measures that could restrict high levels of household debt at a portfolio level. This mitigates debt serviceability risks by more directly addressing the underlying vulnerability.

OSFI also called out this issue in its semi-annual update to its Annual Risk Outlook. In those publications, we observed that different Canadian lenders have different risk appetites with unique business models in a highly competitive mortgage market. Therefore, a simple, macroprudential LTI measure may not be fit-for-purpose in Canada.

Result

Based on the consultation feedback, OSFI changed its approach to debt serviceability. We’re moving from a uniform, policy-based LTI restriction that would be standard across the industry, to a more nuanced and tailormade approach at an individual FRFI-level. This means that our direction changed from a macroprudential to a microprudential implementation.

The measure will be applicable for new originations at the portfolio level, not for individual borrowers. On a quarterly basis, each institution will need to assess the portion of the newly originated loans that exceed the 4.5x loan to income multiple.

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.

Purpose

“High household debt is still relevant to credit risk, the safety and soundness of federally regulated institutions, and the overall stability of the financial system. During the low interest rate environment, mortgage and other household debt continued to build up despite existing measures.” Peter Routledge

Whereas both debt service ratio limits and the MQR aim to address debt serviceability, this new measure will act as a backstop. OSFI’s LTI framework will be help prevent a similar buildup of loans on books given to highly leveraged and indebted borrowers in the future.

Rationale

This approach will allow institutions to continue competing on a relative basis as they have done in the past.

OSFI has also conducted quantitative modeling exercises to assess different potential frameworks for the development of the limits. However, despite a significant increase in complexity of the approaches, the resulting limits were in-line with this simplified approach.

Implementation

The LTI measure is expected to take effect as of each institution’s respective fiscal Q1, 2025. Once implemented, OSFI will expect quarterly compliance reporting.