A major credit rating agency is weighing in on Canada’s mortgage rule framework, arguing regulators made the right call in keeping both the mortgage stress test and new loan-to-income limits in place earlier this year.
In a new commentary, Morningstar DBRS said the Office of the Superintendent of Financial Institutions made a “prudent” decision by maintaining the stress test alongside recently introduced loan-to-income (LTI) caps, rather than treating the two as substitutes.
The assessment comes as the market heads into a critical period for mortgage renewals, with millions of borrowers expected to face significantly higher rates than when they first took out their loans.
“We view the newer LTI portfolio limit and the existing MQR mortgage stress test as each having a specific role to play in reducing banks’ credit risks across interest rate and economic cycles, and we believe that OSFI has made the most prudent decision in choosing to maintain both requirements,” said Josh Veenkamp, Assistant Vice President, North American Financial Institution Ratings at Morningstar DBRS.
Morningstar says the two tools address different risks, with the stress test supporting borrower resilience through rate cycles while LTI limits are intended to constrain higher leverage across the system.
Stress test “proved its worth” through rate shock
During the Bank of Canada’s aggressive tightening cycle from early 2022 to mid-2023, borrowers faced a rapid increase in borrowing costs, but delinquency rates remained relatively contained, something the report attributes in part to the stress test.
Borrowers who took out mortgages at ultra-low pandemic-era rates—some as low as 1.5%—were still required to qualify at a minimum rate of 5.25%. That buffer, the agency says, helped absorb much of the payment shock as rates climbed.
“In our view, the mortgage stress test proved to be an effective tool in limiting mortgage delinquencies following a rapid 475-basis point increase in the Bank of Canada’s (BoC) overnight rate between March 2022 and July 2023,” Morningstar DBRS said.
Mortgage arrears remained relatively stable through the rate-hiking cycle despite sharply higher borrowing costs. But that resilience is now set to be tested as roughly 3.1 million mortgages, or about 52% of all outstanding loans, come up for renewal by the end of 2027, many at higher rates.
The data also reinforces something that’s long been true in Canada—arrears tend to follow the job market more than interest rates.
LTI limits target a different risk
While the stress test looks at individual borrowers, the newer LTI limits are meant to address how much leverage is building across the system. Introduced in 2025, the rule caps the share of newly originated uninsured mortgages that exceed 4.5 times a borrower’s income, applying at the portfolio level with thresholds tailored to each lender.
The intent is to prevent a buildup of highly leveraged loans during periods of low rates, something that contributed to the rapid run-up in home prices during the pandemic.
“LTI limits should be effective at limiting the buildup of highly leveraged mortgage origination volumes, particularly when interest rates are low, whereas the mortgage stress test provides a cushion for individual borrowers to absorb higher interest rates at renewal,” the report said.
As of early 2026, roughly 16% to 18% of uninsured mortgages had an LTI ratio above 450%, still below the level where the cap begins to meaningfully constrain lending, with OSFI noting that “virtually none” of its regulated lenders are currently hitting those limits.
The cap would begin to bind if borrowing conditions loosen, particularly once the share of high-LTI loans moves into the mid-20% range.
What this means for mortgage rules
Morningstar’s commentary suggests the current framework of federal mortgage rules is likely to remain in place for the “foreseeable future.”
While there’s been some industry debate about whether the stress test should be eased or replaced, the report pushes back on that, arguing the two measures aren’t interchangeable.
While OSFI has indicated it remains open to revisiting the stress test if lenders push for changes, Morningstar says it is not aware of any such requests.
The report also raises questions about how any changes would be applied across the system, particularly whether the Department of Finance would follow suit for insured mortgages.
“If not, this may push more borrowers into the uninsured space, as seen when Finance Canada introduced its stress test in 2016,” Morningstar said. “This would transfer some credit risk from the federal government and private insurers onto the banks’ balance sheets.”
It also suggests little appetite, at least from a credit risk perspective, for loosening underwriting standards ahead of a major renewal cycle, with the report calling it the “most prudent” approach to keep both measures in place.
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Last modified: April 21, 2026