OSFI takes focused action to reduce systemic banking system risk

As shared in its Annual Risk Outlook (2022-23), OSFI is taking action to ensure that federally regulated financial institutions are well prepared to address the risk of persistent, outstanding consumer debt that can make lenders more vulnerable to negative economic shocks. Accordingly, this Advisory outlines regulatory expectations with respect to Combined Loan Plans (CLPs), loans with shared equity features, and reverse mortgages.

CLPs are an innovative product that have become the predominant uninsured real estate secured lending (RESL) offering, and they can provide great value to Canadians. As their structures evolve, so too must our approach and treatment of such exposures. The most significant concern with these products is the re-advanceability of credit above the 65 percent Loan-to-Value (LTV) limit. Products structured in this way could lead to greater persistence of outstanding balances and increase risks to lenders and households.

For most borrowers using CLPs, these changes will have no effect on the way that they use their products. For those who owe more than 65 percent LTV, there will be a gradual period where a portion of their principal payments will go towards reducing their overall mortgage amount until it is below 65 percent of its original loan to value and not be re-advanceable. This will typically happen the next time borrowers renew their CLP after the end of October or December 2023 depending on the lender’s fiscal year. 

Sound mortgage underwriting remains the cornerstone of a healthy residential mortgage lending industry. We are confident that our actions today are responsible, fit for purpose and contribute to its continued resilience. By acting prudently, making evidence-based decisions, engaging with regulatory partners, and being clear about our expectations of lenders, OSFI is building a foundation of stability regardless of what lies ahead.

“OSFI is continuously monitoring the economic environment for a range of vulnerabilities that could pose a risk to the health of Canada’s financial system. Today, we have asked federally regulated financial institutions to make their innovative mortgage products safer and more sustainable over the long term. We are confident that our actions today will contribute to the continued resilience of Canada’s residential mortgage lending industry, and in turn of our financial system.”

- Peter Routledge, Superintendent​