Rumour has it that lending limits for home equity lines of credit (HELOCs) could be slashed come the end of this month. These moves, which relate to the Office of the Superintendent of Financial Institutions’ new mortgage underwriting guidelines, will limit federally regulated lenders to limit all new HELOCs to 65 percent loan-to-value, down from the current rate of 80 percent.
Canada’s big banks are required to comply with new guideline by the end of the fiscal year – October 31, 2012. However many lenders are already planning changes to take effect in September.
What is a Home Equity Line of Credit?
A line of credit acts as a pool of funds that can be accessed by a homeowner whenever necessary. A secured line of credit taken from the equity built in your home, a HELOC allows you easy access to cash that would otherwise be tied up in your property. HELOC rates are normally reasonably low and terms tend to be quite flexible.
Productive Uses for HELOCs
Well-qualified borrowers can use a HELOC to their advantage. On the flip side, a HELOC can be a terrible financial decision for individuals who have difficulty curbing their spending. The follow are a few productive uses of this type of financing:
- Investment borrowing
- Educational borrowing
- Rental property investments and improvements
- Value-adding home improvements
- One-time debt consolidation
- An emergency backup fund
- An alternative to another higher-rate loan
What Happens to Current HELOCs?
According to the OSFI, all existing HELOC holders will be grandfathered, maintaining their current rate. As such, if you’re in need of a 66 percent – 80 percent loan-to-value rate, now’s the best time to contact your mortgage broker and secure the best available option.
Rules to Note
Other key changes to HELOCs are as follows:
- Modifications: Borrowers who wish to modify their HELOC after the rule change takes effect could potentially be subjected to the new 65 percent loan-to-value limit. If you haven’t reviewed your HELOC recently, now is the best time to review your rates and make any necessary changes.
- Readvanceable Mortgages: Borrowers who obtain this type of financially can still secure an 80 loan-to-value rate. However, 15 percent of this will need to be amortizing. For example, some lenders will offer a 65 percent loan-to-value secure line of credit plus a 15 percent loan-to-value mortgage, providing you with 80 percent.
- Further, if you have a readvanceable mortgage under the new rules that is two-piece (i.e. part line of credit, part amortized mortgage) the mortgage portion will not be readvanceable if the line of credit portion is greater than or equal to the full 65 percent of your home value. (Different lenders may have different policies. Have your mortgage broker check for specifics.)
Currently, no banks have announced new HELOC rules. Stay tuned to the Mortgage Talk Blog for more information on this story. We’ll provide updates as more information is made available.