In more detail
Regulators are concerned about an increasing level of consumer indebtedness and mortgage lending risks, particularly related to consumers' ability to service their debt. These risks have increased considerably since the onset of the COVID-19 pandemic. In a rising rate environment, there is a higher risk of default. This, combined with falling residential home prices, may lead to increased losses for financial institutions.
OSFI attributes increased indebtedness in part to heightened housing market activity and historically unprecedented price increases across Canada. Banks and other regulated lenders are believed to be connected to the rising indebtedness, as it is estimated that federally regulated financial institution (FRFI) lenders hold approximately 80% of all residential mortgages in Canada.
In addition to the minimum qualifying rate (MQR) for mortgages, OSFI is considering new measures for B-20, which include volume limits on high loan-to-income (LTI) and high debt service lending. The MQR is a minimum interest rate that is applied in debt service coverage ratio calculations to test the borrower's ability to afford higher debt payments in the case of negative shocks to income, or increases in interest rates or expenses. The MQR for uninsured mortgages is currently set at the greater of the mortgage contract rate plus 2% or 5.25% (uninsured mortgages are residential mortgages with a down payment of 20% or more). OSFI is seeking stakeholder feedback on the following debt serviceability measures, including the impacts they may have on borrowers and lenders:
- LTI and debt-to-income (DTI) restrictions — i.e., measures that restrict mortgage debt or total indebtedness as a multiple, or percentage, of borrower income.
- Debt service coverage restrictions — i.e., measures that restrict ongoing debt service (principal, interest and other related expenses) obligations as a percentage of borrower income.
- Interest rate affordability stress tests — i.e., a minimum interest rate that is applied in debt service coverage calculations to test a borrower's ability to afford higher debt payments in the event of negative financial shocks.
These measures rely on the quality of income information collected about consumers. OSFI has previously identified several common issues that are considered problematic relating to loan underwriting, specifically income verification.
