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New OSFI LTI Limits and Mortgage Dynamics

Notepad with "OSFI LTI Limits" written on it, a wooden house cutout, keys, and a smartphone on a white background.

The recent announcement by the Office of the Superintendent of Financial Institutions (OSFI) regarding loan-to-income (LTI) limits in Canada has caused people to wonder about the implications. These new regulations aim to restrict the proportion of new mortgages with loans exceeding 450% of borrower income. 

OSFI has not yet provided clear guidance on the exact proportion of loans exceeding 450% of borrower income that banks are expected to adhere to. Instead, OSFI plans to evaluate this threshold on a case-by-case basis, suggesting that each bank’s compliance will be assessed individually.

More information is expected to be released in the future; the regulations aren’t expected to be implemented until next year.

Potential Impact of LTI Limits

A recent Edge Realty report notes that because of the lack of specifics, however, it is hard to assess the impact. However, only 12% of new mortgages surpass the 450% LTI ratio, a notable decline from 26% in 2022. 

Line graph illustrating the total share of new mortgages with an OSFI-regulated loan-to-income ratio above 450% from 2014 to 2023, peaking in 2020.

Line graph illustrating the impact of OSFI LTI limits on the share of new mortgages with a loan-to-income ratio above 450% from 2014 to 2023, comparing first-time buyers

First-time homebuyers are likely to be among the most affected, since they are more likely to be highly leveraged borrowers. OSFI is requiring banks to include all forms of secured borrowing, including HELOCs and private mortgages, in their LTI calculations, which would increase the numbers impacted by the 450% limit. This inclusion could significantly impact investors and recreational property buyers, who may rely heavily on such financing methods for down payments.

Those exceeding the 450% LTI threshold may face higher interest rates as banks seek to mitigate perceived risks and navigate increased regulatory scrutiny. While getting more details from OSFI is important, the Edge report suggests this appears to be a modest tightening rather than a major change.

Related Household Debt Trends 

Mortgage Declines

There are broader trends within the mortgage market, as well, including the first consecutive monthly decline in residential mortgages since 2016, which can be seen in non-seasonally adjusted numbers, highlighting the prevailing softness in mortgage demand.

The seasonally adjusted data is not significantly better, with residential mortgage credit outstanding numbers showing a mere 0.2% month-on-month increase in January, marking the lowest monthly rise since the previous summer. Furthermore, annual growth dwindled to a mere 3.4%. The Edge Realty report notes that, given these figures, when growth is the lowest it has been in decades, tightening mortgage regulations seems redundant.

Bar graph displaying monthly changes in chartered bank total residential mortgages from January 2020 to January 2024, considering OSFI LTI limits.

Dual graphs analyzing the impact of OSFI LTI limits on residential mortgage dynamics: the left bar chart depicts month-on-month changes; the right line graph shows year-on-year growth, both over 201

Source: Edge Realty Analytics – The Edge Report March 24

Credit Card Concerns

The report also suggested that a better area to target for mitigating risk is escalating credit card balances, which surged by an additional 1.1% on a seasonally adjusted basis in January, and shows a rate five times higher than that of mortgage balances’ growth. There are other signs of deterioration in credit card trends, as well. February card trust data indicated significant sequential increases in net charge-offs across all trusts. At the same time, there was also a slight rise in delinquencies across all reporting trusts.

Line graph showing chartered bank credit card loans from 2015 to 2024, with a notable increase starting from 2022 influenced by OSFI LTI limits.

Source: Edge Realty Analytics – The Edge Report March 24

Rising HELOCs

After steadily decreasing since mid-2022, HELOC balances are rising again. This resurgence is noteworthy at this time, given the current economic context of a cooling economy. The fact that HELOC balances are increasing during this economic slowdown raises questions and concerns about the increase in debt reliance.

Bar chart showing monthly percentage change in chartered bank heloc loans from January 2022 to January 2024, adjusted for OSFI LTI limits and seasonally adjusted.

Source: Edge Realty Analytics – The Edge Report March 24 

Given the declining mortgage demand and rising credit card and HELOC balances, there are signs of increased financial strains. In terms of the LTI regulation impacts, it appears more people are waiting to take on a mortgage at this time, anyway. However, the restrictions may have an impact on those increasing numbers with HELOC loans. Again, as more information comes out, the impacts can be more accurately assessed.

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