The Office of the Superintendent of Financial Institutions (OSFI) first floated the idea of switching from its current “stress test” requirements — which limit borrowers to a minimum qualifying rate (MQR) of 5.25% or 2% above the borrower’s contract rate, whichever is higher — to something directly tied to income back in January of 2023.
At the time, the proposal came alongside a pair of others related to debt service coverage restrictions and an interest rate affordability test. Roughly nine months later, in the fall of 2023, OSFI announced it was ditching the others, but would explore the switch from its current MQR to the new loan-to-income (LTI) approach.
As a first step, OSFI introduced a portfolio-level LTI cap for federally regulated lenders, which took effect at the start of each institution’s fiscal first quarter of 2025. The rule limits the share of new uninsured mortgages that exceed 4.5 times a borrower’s gross annual income, applied at the portfolio level rather than to individual loans.
“We’re going to test [LTI] next year and if it works the way we want, and we’ll probably have to tighten or loosen the bolts here and there, we expect it be a legitimate alternative or a legitimate complement to the MQR,” OSFI Superintendent Peter Routledge said in a speech delivered this past October. “We’ll make that decision after we have a full year of testing to make sure if we do anything, we do it right.”
Now, OSFI is offering additional details to a change that appears to be gaining momentum.
“OSFI will be evaluating the Loan-to-Income (LTI) limit framework until at least January 2026, after which we will determine if the LTI is an appropriate complement or replacement for the Superintendent prescribed Minimum Qualifying Rate,” OSFI spokesperson Cory Harding told Canadian Mortgage Trends.
“The key criteria will be based on what we learn from the LTI implementation,” he added. “While both LTI and MQR are intended to reduce mortgage lending risks, the LTI limits are expected to contain overall residential mortgage credit risk to institutions.”
What it could mean for buyers and prices
The change would put Canada’s lending restrictions in line with peer nations like the United Kingdom, which similarly caps mortgages at four and a half times borrower income.
“Canada’s shift to LTI-based lending aligns with global trends that focus on income-based affordability rather than stress testing for interest rate hikes,” says 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 explains that the downstream effects on home prices, buyer behaviour, lender competition and market volatility could flow in either direction.
On the one hand, he says the switch to an LTI model could make it harder for buyers to qualify, putting a strain on home prices, and inspiring Canadians to pursue smaller or more affordable properties, thus causing greater economic stability at the cost of housing market activity.
Or, it could have the complete opposite effect, allowing more first-time homebuyers to enter the market, driving up prices and demand, while leaving them more exposed to interest rate shocks.
“I would prefer to see, in addition, something similar to Finland’s policy, which has adopted a ‘Housing First’ model to combat homelessness, prioritizing stable housing and affordability,” Grewal says.
“Cities should be prioritizing high-density suburban housing, mixed-use developments, and smart city initiatives to optimize land use,” he added. “We need to relax rules around basement apartments and consider that housing needs to be built in the suburban markets not urban centres. Most families don’t want to live in the core.”
Joe Jacobs, Managing Partner at Mortgage Connection and past Chair of Mortgage Professionals Canada, doesn’t believe the switch would cause significant long-term changes, though he warns there could be some short-term growing pains, especially for first-time borrowers.
“You’d probably see an influx of activity before it was fully launched, but it would slow activity down [once implement], especially If you have both [MQR and LTI] at the same time,” he says. “Would the market rebalance and recalibrate itself over time? Probably, but the initial impact of it would probably be a slowdown in activity, reduction in buyers, and potentially a slowdown in price appreciation.”
Greater impacts in the margins
Practically speaking, Jacobs says most buyers who qualify under the current MQR rules are likely to also qualify under the proposed LTI restrictions. However, that may not be the case if the two restrictions overlap during an initial transition phase.
“In a lot of cases, it’s not really that different; the challenge is, if you layer that on top of a stress test that’s already there, you’re kind of going belt and suspenders and maybe a parachute,” he says.
Jacobs’ primary concern with the proposed change is that it could take away lenders’ ability to be flexible in more unique cases, such as with borrowers who can offer a higher downpayment, by stretching traditional debt ratios.
“You’re seeing LTI probably impact that type of lending more than anything,” he says. “Where else it would impact things is, if rates come down, the stress test is maybe not as impactful as an LTI measurement would be.”
A different test for a different rate environment
Overall, Jacobs believes that the MQR did its job, ensuring Canadians didn’t over-leverage themselves when rates were low, only to be put in a precarious financial situation when they shot back up.
However, while the MQR restrictions likely ensured economic stability as rates went from historic lows to relative highs in recent years, the same rules may not be as well suited for today’s higher-rate reality.
“What’s challenging with [MQR] is it’s probably not dynamic enough, because its tied to rates,” Jacobs says. “Did it serve its purpose when rates were 1%? Probably. Is it still serving the same purpose if rates are closer to 4.5, 5%? Probably not.”
In a perfect world, Jacobs says there would be a test dynamic enough to adapt to different rate environments, without being tied directly to income.
“It’s tough to do it, because it’s kind of a blanket approach as far as how the stress test has been applied, but it’s difficult to have it as nimble as the rate environment,” he says. “The 2% over a base rate is maybe a bit too aggressive based on the environment we’re in, so what many have asked for is removing a stress test as long as rates are at a normalized level or maybe shrinking it.”
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Canadian mortgage rules Cory Harding loan-to-income cap LTI mortgage rules mortgage stress test Office of the Superintendent of Financial Institutions OSFI OSFI mortgage stress test Peter Routledge regulator stress test changes
Last modified: June 7, 2025
