As rising household debt puts our country’s financial system on edge, new guidelines from the Office of the Superintendent of Financial Institutions (OSFI) are about to reduce some Canadian homeowners’ borrowing power.
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The guidelines target combined loan plans (CLPs), also known as re-advanceable mortgages. CLPs, according to OSFI, blend a typical amortizing mortgage loan with a home equity line of credit (HELOC). As you pay down your mortgage principal each month, that money becomes immediately available in a line of credit up to a certain threshold.
“In effect, that allows borrowers to keep their mortgage balance and line of credit at 80 per cent,” explains Christopher Molder, principal broker at Toronto-based Tridac Mortgage. But soon, banks will reduce the credit limit available for re-advancing to 65 per cent to mitigate risk for borrowers and lenders. Depending on the bank’s fiscal year, this change will take effect either at the end of October or December.
Secured debt — like a HELOC that uses your property as collateral — is often the cheapest source of money for a borrower.
The conditions to borrow against your house were especially favourable in the early days of the pandemic when interest rates were at rock bottom and real estate prices were rising, says Ian Calvert, vice-president at HighView Financial Group. He adds that a line of credit is a helpful tool borrowers can tap into to cover large, unexpected expenses that might arise from a job loss, home repairs or medical emergencies.
But experts warn you can run into danger if using a HELOC to supplement your income or to buy consumer goods.
“And the current rules effectively allow borrowers to always stay maxed out at an 80 per cent loan-to-value ratio,” adds Molder.
While some borrowers have already received letters about the changes to the HELOC rules, others who took out a CLP intending to tap into the line of credit for personal or business purposes may be surprised to find the amount available to them has been reduced, says Molder.
“And that could leave them in a bind if they planned to rely on their line of credit to deposit their down payment on a pre-construction home or condo, for example.”
Now that we’re in a higher interest rate environment, Calvert says maxing out your HELOC can cause more harm than good.
Canadians who can only pay the interest will have a harder time saving for a rainy day or retirement.
“Even if you can continue to service your line of credit, you don’t want that to jeopardize your long-term retirement savings.” The bottom line: When they’re used appropriately, HELOCs are a valuable financial tool, but be cautious of using your home like an ATM, says Molder.
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