OSFI proposes changes to capital requirements with eye on mortgage risks

The Office of the Superintendent of Financial Institutions is proposing changes to capital requirements for banks and mortgage insurers to address risks related to mortgages in negative amortization.

The regulator released proposals Tuesday that would require lenders and insurers to hold more capital for loans where payments are insufficient to cover the interest portion.

“The proposed changes should encourage banks to lessen the number of mortgages that would otherwise go into negative amortization,” the regulator said in a release.

The proposals come after interest rates have risen dramatically over the past year, raising the cost of mortgages and in some cases extending amortization periods. The Bank of Canada makes its next interest rate announcement on Wednesday morning.

For lenders, the increased capital adequacy requirements would align with the higher risk from mortgages with a loan-to-value ratio above 65% — where the outstanding balance is 65% or more of the value of the collateral.

For mortgage insurers, the maximum loan-to-value ratio would increase from 100% to 105% under the proposals.

“We have proposed capital requirements to ensure banks and mortgage insurers have adequate capital buffers to absorb risks that arise when mortgages fall into negative amortization,” Superintendent of Financial Institutions Peter Routledge said in a statement. “We believe these incremental changes add necessary resilience to Canada’s mortgage finance system.”

The proposals are out for consultation until Sept. 1, and the changes won’t lead to higher monthly payments for consumers who have a mortgage, OSFI said.

Mark Burgess

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Mark was the managing editor of Advisor.ca from 2017 to 2024.