The Workplace of the Superintendent of Monetary Establishments (OSFI) first floated the thought of switching from its present “stress take a look at” necessities — which restrict debtors to a minimum qualifying rate (MQR) of 5.25% or 2% above the borrower’s contract fee, whichever is larger — to one thing immediately tied to revenue again in January of 2023.

On the time, the proposal got here alongside a pair of others associated to debt service protection restrictions and an rate of interest affordability take a look at. Roughly 9 months later, within the fall of 2023, OSFI announced it was ditching the others, however would discover the swap from its present MQR to the brand new loan-to-income (LTI) method. 

As a primary step, OSFI launched a portfolio-level LTI cap for federally regulated lenders, which took impact in the beginning of every establishment’s fiscal first quarter of 2025. The rule limits the share of recent uninsured mortgages that exceed 4.5 instances a borrower’s gross annual revenue, utilized on the portfolio degree slightly than to particular person loans.

“We’re going to check [LTI] subsequent yr and if it really works the way in which we would like, and we’ll most likely need to tighten or loosen the bolts right here and there, we count on or not it’s a reputable different or a reputable complement to the MQR,” OSFI Superintendent Peter Routledge said in a speech delivered this previous October. “We’ll make that call after we now have a full yr of testing to verify if we do something, we do it proper.”

Now, OSFI is providing further particulars to a change that seems to be gaining momentum.

“OSFI shall be evaluating the Mortgage-to-Earnings (LTI) restrict framework till no less than January 2026, after which we’ll decide if the LTI is an acceptable complement or alternative for the Superintendent prescribed Minimal Qualifying Fee,” OSFI spokesperson Cory Harding instructed Canadian Mortgage Traits.

“The important thing standards shall be based mostly on what we be taught from the LTI implementation,” he added. “Whereas each LTI and MQR are supposed to scale back mortgage lending dangers, the LTI limits are anticipated to comprise general residential mortgage credit score danger to establishments.”

What it might imply for consumers and costs

The change would put Canada’s lending restrictions according to peer nations like the UK, which similarly caps mortgages at 4 and a half instances borrower revenue.

“Canada’s shift to LTI-based lending aligns with world developments that concentrate on income-based affordability slightly than stress testing for rate of interest hikes,” says Paul Grewal, co-founder and president of Highclere Capital. “Nevertheless, the long-term impression on monetary stability and housing affordability stays to be seen.”

Grewal explains that the downstream results on dwelling costs, purchaser behaviour, lender competitors and market volatility might circulate in both course.

On the one hand, he says the swap to an LTI mannequin might make it more durable for consumers to qualify, placing a pressure on dwelling costs, and provoking Canadians to pursue smaller or extra inexpensive properties, thus inflicting better financial stability at the price of housing market exercise.

Or, it might have the exact opposite impact, permitting extra first-time homebuyers to enter the market, driving up costs and demand, whereas leaving them extra uncovered to rate of interest shocks.

“I would favor to see, as well as, one thing just like Finland’s coverage, which has adopted a ‘Housing First’ mannequin to fight homelessness, prioritizing secure housing and affordability,” Grewal says.

“Cities ought to be prioritizing high-density suburban housing, mixed-use developments, and good metropolis initiatives to optimize land use,” he added. “We have to chill out guidelines round basement residences and take into account that housing must be constructed within the suburban markets not city centres. Most households don’t wish to dwell within the core.”

Joe Jacobs, Managing Companion at Mortgage Connection and previous Chair of Mortgage Professionals Canada, doesn’t consider the swap would trigger important long-term modifications, although he warns there might be some short-term rising pains, particularly for first-time debtors.

“You’d most likely see an inflow of exercise earlier than it was absolutely launched, however it will gradual exercise down [once implement], particularly When you have each [MQR and LTI] on the identical time,” he says. “Would the market rebalance and recalibrate itself over time? In all probability, however the preliminary impression of it will most likely be a slowdown in exercise, discount in consumers, and doubtlessly a slowdown in value appreciation.”

Higher impacts within the margins

Virtually talking, Jacobs says most consumers who qualify underneath the present MQR guidelines are more likely to additionally qualify underneath the proposed LTI restrictions. Nevertheless, that is probably not the case if the 2 restrictions overlap throughout an preliminary transition part.

“In loads of circumstances, it’s not likely that completely different; the problem is, for those who layer that on prime of a stress take a look at that’s already there, you’re form of going belt and suspenders and possibly a parachute,” he says.

Jacobs’ major concern with the proposed change is that it might take away lenders’ capability to be versatile in additional distinctive circumstances, corresponding to with debtors who can provide a better downpayment, by stretching conventional debt ratios.

“You’re seeing LTI most likely impression that sort of lending greater than something,” he says. “The place else it will impression issues is, if charges come down, the stress take a look at is possibly not as impactful as an LTI measurement can be.”

A special take a look at for a special fee setting

Total, Jacobs believes that the MQR did its job, making certain Canadians didn’t over-leverage themselves when charges had been low, solely to be put in a precarious monetary state of affairs after they shot again up.

Nevertheless, whereas the MQR restrictions probably ensured financial stability as charges went from historic lows to relative highs lately, the identical guidelines is probably not as effectively suited to as we speak’s higher-rate actuality.

“What’s difficult with [MQR] is it’s most likely not dynamic sufficient, as a result of its tied to charges,” Jacobs says. “Did it serve its objective when charges had been 1%? In all probability. Is it nonetheless serving the identical objective if charges are nearer to 4.5, 5%? In all probability not.”

In an ideal world, Jacobs says there can be a take a look at dynamic sufficient to adapt to completely different fee environments, with out being tied on to revenue.  

“It’s powerful to do it, as a result of it’s form of a blanket method so far as how the stress take a look at has been utilized, however it’s troublesome to have it as nimble as the speed setting,” he says. “The two% over a base fee is possibly a bit too aggressive based mostly on the setting we’re in, so what many have requested for is eradicating a stress take a look at so long as charges are at a normalized degree or possibly shrinking it.”

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Canadian mortgage rules Cory Harding loan-to-income cap LTI mortgage rules mortgage stress test Office of the Superintendent of Financial Institutions OSFI OSFI mortgage stress test Peter Routledge regulator stress test changes

Final modified: June 7, 2025