In March, our banking regulator, OSFI, announced that as of Q1 2025, it will cap the number of uninsured mortgages that each lender can issue where the loan amount is greater than 4.5 times the associated income.
There was a lot of talk about what this means, and a lot of misunderstanding about how this may impact borrowers ability to qualify for a mortgage.
One of the biggest misconceptions I saw in social media and main stream media is that borrowers will not be able to get a mortgage for more than 4.5 times there income, and this is not the case. The limit of 4.5 times the income applies to the lenders overall portfolio of mortgages, and OFSI will want to ensure a certain percentage of the portfolio does not exceed this threshold. And this is where it gets interesting, with lots of unanswered questions;
- What is the acceptable percentage of the portfolio that can exceed 4.5 times income.
- How will it work for real estate investors?
- What about self employed where we see limited income, but strong business financials with the ability to earn more revenue if thy choose to pay themselves more.
- How will the banks choose which loans to allow over the threshold, and which will be declined.
- How will banks communicate once they've reached their limit? Will I get a notification the threshold has been reached,or will I submit a file for approval, and I'll get a decline notification.
- Will pre-approvals be protected or do we have to underwrite those as being under the 4.5 times limit, and ask for an exception once the file goes live?
- Could one of the unintended consequences cause a rise in rents on already stretched tenants? Investors have a hard enough time qualifying for mortgages. Could this policy push them to alternative or private lenders causing mortgage payments to increase and then rents to rise? Or if investors don't qualify, could this mean less supply in an already overheated market, and the options for tenants are limited which can result in an increase in rents?
OSFI has been floating the idea of a loan-to-income (LTI) cap for some time, but it still came as a surprise given our current backdrop. Thus far in 2024, only 12% of new mortgages have exceeded an LTI ratio of 4.5, as compared to 26% in 2022. (Hat tip to economist Ben Rabidoux for that stat.)
That’s why the announcement was a surprise. Introducing an LTI cap now is akin to throwing water on a fire that is already out. But, OSFI stays awake at night, worrying, and plotting ways they can protect the banks from an overheated real estate market.
Written by:
Steve Kornbluth
TMG Safebridge Mortgage Solutions
steve@safebridgefinancial.com
Office - 905-290-0180
Cell - 416-659-7128
Broker License # 10524
Agent Level 2 License # M08003933
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