Did you know? OSFI (Office of the Superintendent of Financial Institutions) is a federal banking regulator responsible for keeping Canada's banking system among the most secure (if not the most secure) in the world.
Its regulations and bank guidance aren't always popular with home buyers and owners, as well as with other players in the mortgage industry who advocate on their behalf.
A new loan-to-income cap? How it might affect you.
Planning on buying a home soon? You may need to adjust your 'dream' home expectations.
The new LTI regulation may not affect every mortgage approval. But be forewarned — it might shrink what you can borrow and further diminish single-home ownership in Canada.
What is OSFI?
For new uninsured mortgages (so far)
Making enough to buy a home?
Impact on first-time buyers
LTI evidence of The Shrinking Home
It's a bank-side rule, will you ever really see it?
If you fall outside the 4.5% LTI ratio, you'll pay more
LTI Cap: The potential winners and losers
More investors, less single-home owners?
Canada's Shrinking Homeownership
Help to 'unshrink' your home amount
The case of 'The Shrinking Home'?
Are you hoping that if (when) rates fall, you'll be able to afford 'more' home? The latest OSFI regulation may interfere with your plans.
Starting in Q1 2025, a new loan-to-income (LTI) cap is intended to discourage banks from over-lending to overleveraged homebuyers who seek to buy a larger, higher-priced home when mortgage rates are lower.
The LTI measures your loan amount against your gross annual income. The new cap will limit the number of mortgage loans a bank can hold with an LTI over 4.5 times a borrower's income.
For new home purchases (not existing mortgages or renewals), this rule could have the biggest impact on first-time buyers trying to break into the market, who currently face steeper home affordability challenges.
Here's the possible impact on home buying in Canada.
Only for uninsured mortgages (so far).
OSFI is keen on protecting banks from the risks posed by their uninsured mortgage portfolios.
Unlike insured mortgages, which are government-backed and won't significantly impact the bank's bottom line in the event of default, uninsured mortgages carry that higher risk of default.
So, this new regulation piles on this mortgage cohort, meaning that if you buy a home with at least a 20% down payment, you may face this LTI limit if your bank has reached its LTI-cap ceiling.
Also of note is that this calculation includes all loans against the property, such as second mortgages and lines of credit, as well as mortgages on other properties you own.
Making enough to buy a home?
The LTI measure may become more of an issue in challenging housing markets, such as the more expensive centres of Vancouver and Toronto, where borrowers may need to borrow more than 4.5 times their income to get their foot in the real estate door.
Yet, home prices aren't necessarily that 'inexpensive' in other Canadian centres. Salary levels are often tied to local supply and demand, which can also impact local home pricing and make housing expensive relative to salaries.
Statista Canada states, "Between 2015 and the fourth quarter of 2023, house prices had outgrown the nominal disposable income by 39%" — and that affordability difference is why OSFI is ensuring banks are more careful in home financing loans.
The Shrinking Home? Some LTI evidence.
This regulation is on the bank side, so will you ever really see it?
If a lender hits their OSFI-imposed quarterly cap, the next quarter will likely require a lowered cap to compensate. But that's private information — no bank will publicly share operational details (nor will OSFI).
OSFI says the LTI cap will be applied differently for each bank, based on its portfolio history and management processes.
Home buyers may not be aware that big-bank mortgage rates offered to them are more expensive, or whether their applications are being rejected due to this regulation.
Does your application fall outside the new 4.5% LTI measure? You'll probably pay more.
Ultimately, this new bank LTI rule means there is a greater potential that banks will charge you higher uninsured rates if your LTI exceeds 4.5%. A higher rate helps the bank hedge against uninsured mortgage risk (default) and balance the books in light of the OSFI cap.
Or, if the regulated banks say 'no' to your application — whereas before the LTI test, they would have said 'yes' — a mortgage solution with an alternative or private lender might be your only option, though you may pay higher rates and fees.
Loan-to-Income Cap: Who Benefits?
Winners
Those who make more or own more are most likely to benefit from the cap through lower rates or exemptions.
- Financially stronger applicants – Good credit, steady income, lower debt
- Higher-income earners
- Insured borrowers – Less than 20% down is not subject to LTI-cap rules
- Investors – High net worth individual with private banking privileges that can get favoured deals
- Banks – It would be prudent to charge higher rates on any applications over 4.5% LTI that they do accept
- CMHC – More insured mortgage business from home buyers avoiding the uninsured LTI cap
- OSFI – Waving Canada's 'most-secure banking sector' banner (not a bad thing)
Potential Losers
Buying a home will be costlier or out-of-reach for some, pushing more Canadians to rent for longer (or forever).
- Many first-time home buyers who already face affordability challenges
- Next-time home buyers who may not qualify for the home they want, even with equity built up
- Home buyers in higher-priced areas (such as Toronto and Vancouver)
- Those who have a 20% down payment saved may opt for an insured mortgage instead (and pay the insurance premium)
- If rents stay high due to demand, renters may have an even harder time saving enough down payment to own a home
The case of 'Canada's Shrinking Homeownership.'
The 4.5% LTI measure can potentially put more homes in the hands of fewer Canadians.
As rates go down, investors who invested heavily during the pandemic while interest rates remained at all-time lows will be back in the market for houses, as the rental market stays hot — driven by recent record immigration, high home prices, and a chronic lack of housing inventory expected for years to come. From 2011 to 2021, the number of households renting the homes they live in increased by more than 21%.
The LTI cap could shut out more lower-income buyers, which would add to an already concerning trend of declining single-property owners — which had climbed steadily to 69% between the 1970s and 2010 but has since declined to 66.5% in 2021 — presumably due to rapidly rising home prices and, more recently, the rapid rise of interest rates.
Need home-buying strategies to help 'unshrink' your home amount?
- Go for the insured mortgage. An insured mortgage (less than 20% down) gets you out from under the LTI cap. You'll need to pay an insurance premium, but will receive a lower rate than an uninsured mortgage.
- Ask for that promotion. The more you make, the more home you can get approved for.
- Save or gather a larger down payment. There are government savings programs available, or perhaps a gifted down payment can help reduce your LTI ratio.
- Team up with family or (vetted) strangers to strengthen your application and add applicants' income.
- An alternative (or private) lender may be an option. Lenders that aren't regulated by the federal government or have higher LTI limits may charge higher rates and fees, but they could also offer a viable short-term mortgage solution to help you start your journey, allowing you to renew into lower 'traditional' rates later.
Are there ways to improve your details to increase your chances of mortgage approval?
The LTI rule means that banks will likely scrutinize home purchase applications more closely.
If you're concerned that you may be in the more 'leveraged' category and you want to help improve your application, our friendly, expert brokers can help you strategize.
Stronger application details can include:
- Good credit (a score of 680 or above)
- Strong and steady income sources that are easily verifiable
- Lower overall debt (gives you a lower TDS ratio)
- Adding applicants with strong financial details
- Including non-traditional income for your mortgage application
- A bigger down payment that lowers your LTI
We expand your ability to save more.
If ever you needed a helping (mortgage) hand, that time is now (and yesterday, and tomorrow).
Our highly trained brokers know the mortgage industry inside and out. We can source your best mortgage solution, your best rate, and the best strategy to help realize your dream of owning your first home.
Give us a try anywhere you are in Canada. Over 17,000 happy clients have given us glowing reviews (the most in the industry, by far), because we believe in putting your needs first.
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