Canada’s banking regulator has unveiled three new regulatory proposals that would additional prohibit mortgage lending pending a newly-launched session interval.

The Workplace of the Superintendent of Monetary Establishments (OSFI) introduced the proposals Thursday in response to what it says are constructing dangers in Canada’s residential mortgage market.

“Unprecedented home worth will increase have been accompanied by report ranges of family indebtedness, of which residential mortgages account for a big share,” OSFI stated in its session doc. “Federally regulated monetary establishment (FRFI) lenders, which maintain roughly 80% of all residential mortgages in Canada, are uncovered to heightened dangers from this indebtedness.”

OSFI’s three proposals embody:

• Mortgage-to-income (LTI) and debt-to-income (DTI) restrictions

This may contain measures that prohibit mortgage debt or whole indebtedness as a a number of or proportion of borrower earnings.

Federally regulated monetary establishments present don’t have prescribed LTI or DTI limits, nonetheless OSFI notes an LTI of 450% is often thought of “excessive” and has been on the rise because the begin of the pandemic.

OSFI is due to this fact proposing a “lender-level” restrict that may prohibit lenders to a sure quantity of loans that exceed a “prudent” threshold.

“Imposing such limits might also cut back the potential for coverage leakage and migration of lending exercise to the unregulated lending sphere,” OSFI says.

• Debt service protection restrictions

This may contain measures that prohibit ongoing debt service (principal, curiosity and different associated bills) obligations as a proportion of borrower earnings.

Lenders should make use of Gross Debt Service (GDS) and Whole Debt Service (TDS) limits on insured mortgages (these with a down fee of lower than 20%), that are at the moment 39% and 44%, respectively.

Nevertheless, this doesn’t apply to uninsured mortgages, however that’s now being thought of by OSFI, together with the implementation of graduated or tiered limits.

Moreover, OSFI stated it might restrict lenders to a sure quantity of loans with excessive debt-service ratios.

• Rate of interest affordability stress exams

The ultimate proposal might see OSFI undertake extra “risk-sensitive” exams of affordability past the present Minimal Qualifying Fee (at the moment 5.25%) used within the current mortgage stress exams.

OSFI advised lenders could possibly be requested to implement various MQRs based mostly on completely different threat traits and product sorts, similar to completely different mortgage phrases.

Regardless of its considerations about threat out there, OSFI head Peter Routledge informed the Globe and Mail that debtors are at the moment in good condition, and that these proposed modifications are about guaranteeing it stays that method.

“Debt serviceability is among the many strongest it’s ever been,” he was quoted as saying. “99.86 per cent of Canadians are present on their mortgages,” an all-time low arrears fee.

“We’d wish to hold that going,” he added, however acknowledged delinquencies are anticipated to “deteriorate just a little bit from right here.”

Session interval

Not one of the proposed modifications will likely be finalized till after OSFI’s session interval, which is now open till April 14, 2023.

“Sound mortgage underwriting stays the cornerstone of a wholesome residential mortgage lending business,” stated OSFI’s assistant superintendent, Tolga Yalkin. “We stay up for stakeholder views on how completely different debt serviceability measures can help this vital coverage goal.”

OSFI stated it might select to pursue “a number of of those measures or others that meet OSFI’s prudential coverage goals.”