The Canadian housing market has faced major shifts in recent years, from rising interest rates to tighter lending standards. Now, a new proposal from the Office of the Superintendent of Financial Institutions (OSFI) could further reshape how Canadians qualify for mortgages. The regulator is considering introducing a loan-to-income (LTI) limit, a rule that would cap how much buyers can borrow relative to their income. While the details are still being finalized, this move has the potential to significantly impact homebuyers, lenders, and the overall real estate market.
What Is Loan-to-Income (LTI)?
Loan-to-income (LTI) is a measure that compares the size of a borrower’s mortgage to their household income. For example, if a household earns $120,000 annually and takes on a $600,000 mortgage, their LTI ratio is 5. An LTI limit would essentially restrict households from borrowing beyond a certain multiple of their income, regardless of whether they could pass the existing stress test or qualify under today’s guidelines.
In markets with higher home prices, such as Toronto and Vancouver, many borrowers already have LTI ratios above 4.5 or 5. That means if OSFI introduces a firm cap, a significant portion of buyers may need to either lower their budget or delay purchasing altogether.
Why Is OSFI Proposing This Rule?
OSFI’s primary role is to protect Canada’s financial system by reducing risk. With interest rates rising sharply in recent years, many households are now carrying higher debt loads than ever before. High loan-to-income ratios leave borrowers more vulnerable if interest rates rise further, if they face job loss, or if housing prices decline.
The regulator has already introduced tools like the mortgage stress test to ensure borrowers can handle higher payments. However, the LTI cap is seen as an additional safeguard. By limiting how much Canadians can borrow relative to income, OSFI aims to reduce household vulnerability and strengthen long-term housing market stability.
How Could This Impact Homebuyers?
For homebuyers, the proposed LTI rules could bring both challenges and opportunities.
- Reduced Borrowing Power: Buyers may no longer qualify for the same size of mortgage they would under current guidelines. This could push some Canadians into smaller homes, condos, or different markets altogether.
- More Focus on Income Growth: Borrowers may need to demonstrate stronger incomes or dual-household earnings to meet the requirements.
- Slower Market Activity: With fewer buyers able to stretch their budgets, housing demand could cool in high-cost markets.
While this may be frustrating for those looking to enter the market, it could also help reduce bidding wars and slow price growth in overheated areas. In the long run, that could make housing more affordable for Canadians who are priced out today.
What This Means for Current Homeowners
If you already own a home with a mortgage, the new rules likely won’t apply retroactively. However, they could affect you when it’s time to refinance, renew, or move. If your income hasn’t kept pace with the size of your mortgage, you may face new restrictions when switching lenders. This could make it more important to plan ahead, pay down debt, or lock in competitive rates early.
Potential Market-Wide Effects
The introduction of LTI limits would mark one of the biggest regulatory changes in Canada’s mortgage landscape since the introduction of the stress test. Potential impacts include:
- Cooling in High-Priced Markets: Toronto, Vancouver, and other expensive cities could see reduced demand as buyers hit borrowing caps.
- Increased Demand in Affordable Regions: Smaller cities and towns may benefit as buyers look for properties that fit within the new rules.
- Shift in Lending Practices: Lenders may tighten approval criteria even further, focusing heavily on income rather than just down payments or credit history.
Overall, the changes could lead to a more balanced market but may also reduce flexibility for some borrowers.
How Buyers Can Prepare
If you’re planning to buy a home in the coming months or years, here are some strategies to prepare for possible LTI limits:
- Strengthen Your Income Profile – Consider ways to increase household income, such as dual applications, side income, or career growth.
- Pay Down Debt – Reducing other debts (credit cards, car loans, lines of credit) can improve your overall borrowing position.
- Save a Larger Down Payment – A bigger down payment lowers your mortgage amount and helps keep your LTI ratio in check.
- Explore Different Markets – Expanding your search beyond Canada’s priciest cities may open up more affordable opportunities.
- Get Pre-Approved Early – If rules are introduced soon, locking in a pre-approval under current guidelines could help preserve borrowing power.
Final Thoughts
The proposed OSFI loan-to-income rules represent a significant shift in how Canadians may qualify for mortgages. While they could make it harder for some buyers to enter the market, the intention is to strengthen financial stability and reduce risks tied to rising debt levels. For prospective homebuyers, preparation will be key. By focusing on income, debt management, and saving strategies, it’s possible to adapt to these changes and still achieve your homeownership goals.OSFI
