The Office of the Director of Financial Institutions (OSFI) first proposed the idea of switching from the current “stress test” requirement – limiting borrowers to a minimum qualified rate (MQR) of 5.25% or higher than the borrower’s contract rate than the borrower’s contract rate, which in January 2023 is directly related to income.
At the time, the proposal was accompanied by a pair of other proposals related to debt service coverage restrictions and interest rate affordability testing. About nine months later, in the fall of 2023, OSFI announced that it was abandoning others but would explore a shift from current MQR to new loan-to-income (LTI) approaches.
As a first step, OSFI introduces a portfolio-grade LTI cap for federally regulated lenders that are effective at the start of each institution’s first quarter of 2025. The rule limits the share of new uninsured mortgages, exceeding 4.5 times the borrower’s annual income, rather than at the portfolio level rather than individual loans instead of individual loans.
“We want to test it [LTI] Next year, if it works the way we want it to, we may have to tighten or relax the bolts everywhere, and we hope it is a legal option or a legal addition to MQR.
Now, OSFI is providing additional details for changes that seem to be gaining momentum.
“OSFI will evaluate the loan-to-income (LTI) restriction framework by at least January 2026, after which we will determine that LTI is appropriately supplemented or replaced by the principal’s minimum pass rate.” Canadian Mortgage Trends.
“The key criteria will be based on what we learned from LTI implementation,” he added. “While both LTI and MQR are designed to reduce mortgage risk, the LTI limit is expected to include overall residential mortgage credit risk for institutions.”
What does this mean for buyers and prices
The change will align Canada’s loan restrictions with peers like the UK, which similarly limits mortgages to four and a half times that of borrowers.
“Canada’s LTI-based lending is aligned with global trends that focus on affordability based on income rather than stress tests on rising interest rates,” said Paul Grewal, co-founder and president of Highclere Capital. “However, the long-term impact on financial stability and housing affordability remains to be seen.”
Grewal explained that the downstream impact on home prices, buyer behavior, lender competition and market volatility may flow in any direction.
On the one hand, he said the switch to the LTI model could make it harder for buyers to qualify, put pressure on home prices and inspire Canadians to pursue smaller or cheaper real estate, thus creating greater economic stability at the expense of housing market activity.
Or, it may have the exact opposite effect, allowing more first-time home buyers to enter the market, increase prices and demand while making them more vulnerable to interest rate shocks.
“In addition, I would like to see something similar to Finnish policy, which adopts the ‘housing first’ model to combat homelessness, prioritizing stable housing and affordability,” Greval said.
“Cities should prioritize high-density suburban housing, mixed-use developments and smart city initiatives to optimize land use,” he added. “We need to relax the rules around basement apartments and think that housing needs to be built in suburban markets rather than in the city centers. Most families don’t want to live in the core.”
Joe Jacobs, managing partner of Mortgage Connect, the former chairman of Canadian Mortgage Professionals, does not believe that the shift will lead to long-term changes, although he warns that there may be some short-term growth pain, especially for first-time borrowers.
“You may see a large influx of activity before it is fully launched, but it will slow down the activity [once implement]Especially if you two [MQR and LTI] Meanwhile,” he said. “Will the market rebalancing and recalibration over time? Probably, but the initial impact could be a slowdown in activity, a decrease in buyers and a slowdown in price appreciation. ”
The edge has a greater impact
In fact, Jacobs said most buyers who are eligible under current MQR rules may also be eligible under the proposed LTI restrictions. However, this may not be the case if the two limitations overlap during the initial transition phase.
“In many cases, the situation is not much different; the challenge is that if you put it on a stress test that already exists, you’re kind of like a belt and suspension, maybe a parachute,” he said.
Jacobs’ main concern with the proposed change is that it can leverage lenders’ ability to be flexible in more unique situations, such as borrowers who can provide higher down payments by expanding traditional debt ratios.
“You see that LTI can affect this type of loan,” he said. “Where can affect things, if the speed is slowed down, the stress test may not affect the same way as the LTI measurement capability.”
Different tests for different rate environments
Overall, Jacobs believes that MQR has done the job to ensure Canadians don’t overuse themselves when they are low, but can only be in a volatile financial position when they resume shooting.
But while MQR restrictions may ensure economic stability, as interest rates have shifted from historical lows to relatively highs in recent years, the same rules may not fit into today’s advanced reality.
“What’s challenging [MQR] “It may be related to rates because it is related to rates because does it have a purpose at a price of 1%? Probably. If the rate is close to 4.5%, and the rate of 5% is close to 4.5, will the same purpose still be achieved? Probably not.”
In a perfect world, there will be enough testing dynamics to accommodate different rate environments without being directly associated with income, Jacobs said.
“It’s hard to do this because it’s a general approach in terms of how stress testing is applied, but it’s hard to be as agile as a rate environment,” he said. “Depending on the environment we’re in, 2% of the base rate can be a bit radical, so as long as the rate is at a normalization level or shrinking the speed, many people are asking for stress testing.”
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Last modified: June 7, 2025
