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Banking regulator launches consultations on mortgage rules, proposes additions

Canada's banking regulator is launching public consultations on existing and newly proposed mortgage lending rules as it says loan risks have increased considerably since the start of the COVID-19 pandemic.

TORONTO — Stricter rules around qualifying for a mortgage could be coming as Canada's banking regulator seeks feedback on several proposals to limit the number of overstretched borrowers.

The proposals out Thursday from the Office of the Superintendent of Financial Institutions (OFSI) come as part of the first stage of a wide-ranging review of the B-20 mortgage underwriting rules the regulator is conducting this year.

Potential additions to the existing stress test include limits around the proportion of mortgages where the loan is more than 4.5 times the borrower's income, measures that would limit how much debt payments could take up of someone's monthly household income and a more nuanced approach to the existing stress test that could make affordability tests more stringent for higher-risk products like variable rate mortgages.

The review and potential additions come as OFSI said risk around loans and borrowing have increased considerably in recent years.

"Mortgage lending risks, particularly related to debt serviceability, have increased considerably since the onset of the pandemic," the regulator said in its consultation documents.

For example, the number of mortgages that have a high loan-to-income ratio, meaning a loan that's more than 4.5 times a household income, jump to an average of 33.7 per cent of loans since the pandemic started, and topped 40 per cent in early 2022, compared with an average of 23.8 per cent in the seven years prior. 

With borrowers already stressed, the regulator is concerned that inflation, potentially even higher rates to come, and warnings about a coming economic slowdown could stress borrowers and the financial system.

The regulator said the suggested additions could be implemented at either the individual loan level, or in aggregate at the lender level, which depending on the rules could allow banks and others to average out mortgages better and lead to fewer clients being forced to look at unregulated lenders.

National Bank analyst Jaeme Gloyn said in a note that the proposals could affect at least five to 10 per cent of borrowers. While some might simply no longer qualify, others could potentially increase their down payments or qualify for smaller mortgage amounts. 

For lenders he said the impact would be "softer growth, higher capital requirements and potentially lower profitability."

Profitability would be affected in part by the need to hold more capital, though lenders could also increase mortgage rates to offset the impact, said Gloyn. 

The rules would be in addition to the existing rules around minimum qualifying rates, otherwise called the mortgage stress test, which forces borrowers to qualify for a mortgage at a 5.25 per cent interest rate, or two percentage points above the prime rate, with the higher of the two being the threshold.

Stakeholder responses to this first phase of the review are due April 14, which the regulator will then incorporate into its proposed wider revisions to B-20 that will go out for public consultations. 

This report by The Canadian Press was first published Jan. 12, 2023.

Ian Bickis, The Canadian Press

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