The rapid run-up in mortgages during the pandemic represents a “pocket of risk” to the financial system but Canadian lenders are starting to get the problem of ultra-long home loans under control, according to the country’s bank watchdog.

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The change is one of a series of expected adjustments to mortgage guidelines that have been under discussion since last year. OSFI says the new portfolio test is intended “to prevent the buildup of highly leveraged loans during low interest rate periods.” The regulator is particularly concerned about loans that are more than 4.5 times borrower income because they raise the probability of borrower default and increase a lender’s potential losses. As demonstrated by the prolonged period of low interest rates before steep increases beginning in the spring of 2022, such debt may be manageable in a low rate environment but becomes much more challenging for borrowers and their financial institutions when rates rise.

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