BREAKING: OSFI to Implement a Loan-to-Income (LTI) Limit

For a minority of mortgage shoppers, the price of leverage is going up.

Canada's banking watchdog, OSFI, has confirmed to MLN that it will enforce a new restriction on mortgage borrowing.

"The LTI measure we are implementing is a portfolio test that is designed to prevent the buildup of highly leveraged loans during low interest rate periods," an OSFI official told MLN today.

Unlike the #stress test#, which is a borrower-specific limit, "the Loan to Income (LTI) measure is a portfolio test," the regulator says. Hence, there's no rule that says an individual borrower can't have an LTI over 4.5x. It's the lender that will determine what LTI they'll allow, subject to all other underwriting guidelines.

"This measure means that institutions, in any quarter, can only have a certain percentage of their mortgages in excess of 4.5x LTI," OSFI says. Previously, OSFI contemplated a 25% allowance above that threshold, but now it will be case-by-case, depending on the lender.

The new limit "applies to the institution’s portfolio of underwritten mortgages that originate that quarter and needs to be managed by the institution."

For borrowers, here's what this means in practical terms.

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