Canada’s main banking regulator is requiring banks to set aside more capital to protect mortgages facing greater default risk due to higher interest rates.

Under the Capital Adequacy Requirements (CAR), mortgages in which payments are insufficient to cover interest charges must have a minimum loan-to-value ratio of 65%. The Office of the Superintendent of Financial Institutions also revised guidelines for its Life Insurance Capital Adequacy Test (LICAT), Minimum Capital Test (MCT) and Mortgage Insurer Capital Adequacy Test (MICAT).

“The revised CAR and MICAT guidelines establish capital requirements for lenders and mortgage insurers, respectively, that better align with risks associated with growing mortgage balances due to increased interest rates,” said OSFI in a news release. 

The changes guard against negatively amortizing mortgages. OSFI adjusted the requirements after recently finding that Canada’s commercial real estate valuations may be at greater risk of decline than previously anticipated.