OTTAWA (Reuters) -Canada's banking regulator is limiting the number of highly leveraged loans in banks' residential mortgage portfolios, which have ballooned alongside house prices to make Canadian borrowers among the most indebted in the world, the Globe and Mail reported on Friday.

The Office of the Superintendent of Financial Institutions (OFSI) has told lenders they will have to limit loans to borrowers with mortgages greater than 4.5 times their annual income, the newspaper reported, citing two sources familiar with the matter.

The new income limit is expected to take effect in the first quarter of next year, the report said, adding it would not apply to insured loans in which the borrower has to pay for mortgage insurance because their down payment is less than 20% of the property's purchase price.

The banking regulator has already introduced new qualification rules including a minimum qualifying rate that is 2% higher than the borrower's agreed mortgage rate to ensure consumers can withstand future interest rate changes.

Canada's big banks have also set aside more funds to cover loans that could potentially turn sour since the central bank began raising interest rates and the regulator has required to banks to show a strong capital position.

"Banks in Canada have a long history of working with their customers to keep their mortgages in good standing," Canadian Bankers Association, a top lobbying group said.

"Understanding their customers and adapting to their changing circumstances is a top priority. The industry is still assessing the impact of OSFI's policy."

OSFI did not immediately respond to a request for comment.