(Bloomberg) -- Canada’s banking industry regulator will consider limiting how much firms are able to lend to riskier homebuyers as part of a review intended to safeguard the financial system from a housing slump. 

The regulator is proposing restrictions on the volume of mortgages made available to those who are seeking to borrow amounts that are far in excess on their incomes. It’s part of a regular consultation on residential mortgage underwriting standards, which started Thursday. 

Canada’s bank watchdog, the Office of the Superintendent of Financial Institutions, has taken a more assertive approach to managing financial system risks in recent months. In December, it raised a key capital requirement for the banks, and it recently rejected calls to weaken a “stress test” that homebuyers go through to qualify for a mortgage. 

The capital-rule change prompted Bank of Montreal to sell about $2.3 billion in stock and raised questions about whether other lenders may need to follow suit.

Thursday’s consultation paper suggests financial institutions may face future curbs on loans that are large relative to a borrower’s income. One definition of a high loan-to-income deal is when the homebuyer borrows more than 4.5 times her annual income. 

The number of such loans is rising because of stretched home valuations: One-third of mortgage originations are above that 4.5-times threshold since the start of the Covid pandemic, according to OSFI.

The document also asks whether the regulator should consider other new measures to address risks from non-mortgage consumer debt.

“Sound mortgage underwriting remains the cornerstone of a healthy residential mortgage lending industry,” Tolga Yalkin, OSFI’s assistant superintendent for policy, said in a statement announcing the start of the review. “We look forward to stakeholder views on how different debt serviceability measures can support this important policy objective.”

Rapidly-rising interest rates have led to increased concerns about financial distress among Canadian consumers after many took on large mortgages with variable rates to get into the booming housing market. 

The Bank of Canada is signaling that interest rates may have to stay elevated to keep inflation in check, raising the pressure on those borrowers. National benchmark home prices have already dropped 11.5% since February.

(Updates with additional details on OSFI proposals, data on housing market decline)

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