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HELOC Policy Changes and Expected Impact

by Yvonne von Jena | November 14, 2018


A little-known HELOC policy is increasingly being adopted by lenders and has received attention in the media. Under this new qualification rule, applicants must prove they can afford the theoretical monthly HELOC payment based on the limit of that HELOC, rather than the amount that has actually been used. Says Rob McLister in the Globe and Mail, “every credit-policy tightening adds up and weighs on home prices.”

The Expected Impact: Who and How

The change is not expected to have an impact on owner-occupied residences says industry players. However, it is expected to make it more difficult for those seeking additional financing for a second home, a rental / investment property or a cottage.

Even if a person has a zero balance on their HELOC, the lender is assuming the consumer might use all of his / her available credit. Mr. McLister says that for a typical borrower with a $200,000 HELOC limit, they will now need to prove they can afford a $1,202 monthly HELOC payment based on today’s rates and would increase their Total Debt Service (TDS) ratio to over 50%, which is above the maximum HELOC TDS limit of 40 – 44%. The result he says is that “A meaningful minority of Canada’s… HELOC holders will no longer qualify for additional financing like they do today.”

 

Regulators Concerned about HELOC Risk

The regulators have long expressed concerns over increasing debt levels. Filings with Office of the Superintendent of Financial Institutions (OSFI) show the balance of loans secured by residential real estate hit a new high in May 2018 and that the high was led by a surge in personal loans, such as HELOCs.

Bank of Canada governor Stephen Poloz in a speech entitled Three Things Keeping Me Awake at Night, stated “It is not just the amount of debt; it is also its composition and distribution. More than 80% of household debt is composed of mortgages and HELOCs. Increasingly, mortgages are being combined with HELOCs, to the point where about 40% of all housing-backed loans are blended with a HELOC component… [These] borrowers are not regularly paying down their principal, which means that debt loads may persist longer than in the past. Furthermore, some may be using their HELOC to speculate —for example, to fund a down payment on a second house with the intention of flipping it. Given the potential for volatility in house prices and for higher interest rates, such activity may be adding to the overall vulnerability of the system.”

 

Based on statistics from the Financial Consumer Agency of Canada (FCAC) dated July 2017:

  • Banks reported to FCAC that a re-advanceable mortgage is now the default option offered to credit worthy mortgage customers with down payments of at least 20%.
  • Of the approximate 3 million HELOC accounts, 80% were held under re-advanceable mortgages in 2016.
  • The number of households that have a HELOC and a mortgage secured against their home has increased by nearly 40% since 2011.
  • 40% of consumers do not make regular payments toward their HELOC principal.
  • 25% of consumers pay only the interest or make the minimum payment.
  • Most consumers do not repay their HELOC in full until they sell their home.


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