As we suspected (as per my previous writings), on January 29th the Office of the Superintendent of Financial Institutions (OSFI) made permanent the new LTI Test AND kept in place the existing stress test we’ve all come to know and love.

Now some homeowners, residential investors, and those looking to refinance, have not one but two tests they’re required to pass when trying to qualify for a mortgage. Well at least some do… the rules don’t apply to everyone, and they don’t apply equally.

What is the LTI (Loan-To-Income) Test?

In short:

  • Federally regulated lenders are now limited on how many uninsured mortgages (that exceed 4.5 times the borrowers’ qualifying incomes) they are allowed to hold within their whole portfolio.
  • Most importantly, LTI is not applied on an individual loan basis.

What does this mean for mortgage applicants?

Let’s break those points down.

1. As usual, OSFI is responsible for the federally regulated lenders, but not all lenders are federally regulated. Most credit unions are provincially regulated, for instance, and would be exempt from this rule change – but could still voluntarily enforce it.

2. This rule applies to uninsured mortgages which includes a wide range of mortgage product types and purposes. Most affected would be residential real estate investors looking to grow their portfolio, those looking to refinance a home (even a personal residence), and those already struggling to qualify, relying on “Alt” or “B” lending to get approved.

3. How lenders view income may get more interesting. If you’ve been in real estate long enough, you’ll come to learn that not all mortgage lenders view a mortgage applicant’s income the same way. Ask “Lender A” and “Lender B” how much John makes as a self-employed Fortune Cookie Writer (presenting the same income documents), and you may get two very different answers. This fact might become even more important if lenders are looking to squeeze clients in under the test.

4. This rule doesn’t apply to everyone equally. Lenders are judged by how many “overleveraged” mortgages are sitting on the entirety of their whole portfolio. In other words, if your bank already has a lot of “overleveraged” loans on their books, you might get a “No” that might previously have been a “Yes”… BUT if they like you enough, maybe they still take your mortgage application and just deny someone else in the future instead. Smart mortgage brokers are going to know exactly how to play this when it matters.

5. Last, but not least, the playing field isn’t necessarily even for lenders either. The percentage of overleveraged loans that each lender is allowed to have on their books, varies from lender to lender based a variety of factors. The secret sauce, and what those exact percentages are, are apparently an industry secret. A secret that, for at least the time being, is only known by the very few.

Additional Context

At its peak, roughly 1 in 4 new uninsured mortgages had a principal valued higher than that of 4.5 times the homeowner’s income. Rising housing prices, driven by cheap post-pandemic mortgage credit, was the biggest culprit. Nowadays though, that same number sits closer to 1 in 8 mortgages (almost the lowest it’s been in 10 years.)

So why introduce this new rule now?… I’m asking this rhetorically, of course, because it doesn’t make a lot of sense (especially in a rising rate environment).

Or how about a different question….

If these loans (judged by this LTI metric) are seen as risky enough that we don’t want the banks loading up on them and being “at risk”… then why are the CMHC insured mortgages (ultimately backed by the all-mighty taxpayer) exempt from applying this rule? Who is this new test meant to protect?