Understanding the New Loan-to-Income (LTI) Restrictions for Canadian Mortgages in 2025

As of 2025, significant changes are coming to the Canadian mortgage landscape, particularly for financial institutions regulated by the Office of the Superintendent of Financial Institutions (OSFI). These changes revolve around the introduction of Loan-to-Income (LTI) restrictions, a measure aimed at curbing high household debt and ensuring the stability of the financial system. This blog post will delve into what these new LTI restrictions entail, their potential impact on the mortgage market, and how they might eventually replace the current mortgage stress test, similar to what has occurred in the UK.

What Are Loan-to-Income (LTI) Restrictions?

Loan-to-Income (LTI) restrictions are a regulatory measure that limits the amount of mortgage debt a borrower can take on relative to their income. Specifically, the LTI ratio measures the total loan amount against the borrower's gross annual income. Starting in 2025, OSFI will require financial institutions to manage the proportion of newly originated mortgage loans that exceed an LTI ratio of 4.5 times the borrower's income1.

This means that for every dollar of income, a borrower can only take on $4.50 in mortgage debt. The goal of this restriction is to reduce the number of highly leveraged loans in the system, thereby mitigating the risk of defaults and ensuring the overall stability of the financial sector1.

Why Are These Restrictions Being Implemented?

The primary reason for implementing LTI restrictions is to address the high levels of household debt in Canada. Over the past decade, Canadian households have become increasingly indebted, with many taking on large mortgages relative to their incomes. This trend poses a significant risk to the financial system, as highly leveraged borrowers are more vulnerable to economic shocks, such as interest rate increases or job losses1.

By capping the LTI ratio, OSFI aims to reduce the proportion of high-risk loans in the market, thereby enhancing the resilience of financial institutions and protecting the broader economy1.

How Will LTI Restrictions Affect Borrowers?

The introduction of LTI restrictions will have several implications for borrowers:

Reduced Borrowing Capacity: Borrowers may find that they are unable to qualify for as large a mortgage as they could previously. This could particularly impact first-time homebuyers and those in high-cost housing markets like Toronto and Vancouver2.
Increased Scrutiny: Financial institutions will need to closely monitor their mortgage portfolios to ensure compliance with the new LTI limits. This could lead to more stringent lending criteria and increased scrutiny of borrowers' financial situations1.
Potential Shift in Market Dynamics: As banks and other regulated financial institutions adjust to the new LTI limits, there may be a shift in market dynamics. Borrowers who are unable to secure financing from traditional lenders may turn to alternative lenders, such as monoline lenders, credit unions and private mortgages, which are not subject to OSFI regulations2.

LTI vs. Mortgage Stress Test: A Potential Replacement?

Currently, Canadian borrowers must pass a mortgage stress test to qualify for a mortgage. This test ensures that borrowers can afford their mortgage payments even if interest rates rise. However, with the introduction of LTI restrictions, there is speculation that the LTI ratio could eventually replace the mortgage stress test as the primary measure of mortgage affordability1.

This shift has already occurred in the UK, where LTI limits have been used to control mortgage lending and reduce financial risks. By focusing on the borrower's income relative to their loan amount, LTI restrictions provide a more direct measure of affordability and leverage1.

Exemptions and Alternatives

It's important to note that not all lenders are subject to OSFI regulations. Online lenders and credit unions, for example, are not required to adhere to the new LTI restrictions. This means that borrowers who do not meet the LTI criteria with traditional banks may still be able to secure financing through these alternative lenders2.

However, it's crucial for borrowers to carefully consider the terms and conditions offered by these lenders, as they may come with higher interest rates or less favorable terms compared to traditional mortgages.

For Further Guidance

The introduction of LTI restrictions marks a significant change in the Canadian mortgage landscape. As these new regulations come into effect, it's essential for borrowers to stay informed and understand how these changes may impact their ability to secure a mortgage.

If you have any questions or need further clarification on the new LTI restrictions, please don't hesitate to reach out. Our team of mortgage experts is here to help you navigate these changes and find the best financing options for your needs. Contact us today for a personalized consultation and let us help you achieve your homeownership goals.