Last week, Canada’s banking regulator unveiled new rules that will govern how borrowers may use Home Equity Lines of Credit (HELOC).
The new guidelines unveiled by the Office of the Superintendent of Financial Institutions (OSFI), linked here, will affect readvanceable mortgages, specifically those where the outstanding balance is greater than a 65% loan-to-value (LTV).
Readvanceable mortgages are those with two or more portions to the loan, including an amortizing portion and a revolving line of credit. OSFI refers to these products as “Combined Loan Plans,” or CLPs.“The most significant concern with these products is the readvanceability of credit above the 65% loan-to-value (LTV) limit,” OSFI said in its release.
What’s changing?
If you currently have a readvanceable mortgage, when you repay any principal, that money can sometimes be re-borrowed from the line of credit portion of the loan.
But when OSFI’s new rules are fully implemented in 2023, any principal payments to your balance that’s above the 65% LTV threshold will go towards reducing the overall loan balance, and thus the readvanceable borrowing limit, until that limit reaches 65% LTV.
The changes will also apply to reverse mortgages and residential mortgages with shared equity features.
OSFI said the new rules will have no impact on borrower payments. The new rules will take effect on October 31 or December 31 for new borrowers, depending on the lender’s fiscal year-end. For existing HELOC borrowers, the change will take effect on their renewal date if it occurs after the dates noted above.
In terms of the impact of these changes, loan balances above the 65% LTV threshold currently account for $204 billion of the $1.8 trillion in outstanding residential mortgages, according to OSFI. Overall, readvanceable mortgages comprised $737 billion of the market as of Q1 2022, according to Bank of Canada data.
“Our expectations include lenders ensuring that all combined lending product borrowing above a 65% loan-to-value (LTV) limit will be amortizing and non-readvanceable,” OSFI head Peter Routledge wrote in a piece for the Financial Post. “In so doing, we lessen the fragility produced when borrowers sustain high LTV ratios beyond contractual amortization periods.
If you currently have or are in the market for a readvanceable mortgage and have any questions about how these changes might affect your borrowing needs, call me & I'll explain the new rules.