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Banking Regulator making changes to Home Equity Lines of Credit

Last week, Canada's financial regulator came out with new rules as to how borrowers might use Home Equity Lines of Credit (HELOCs).

The new rules by the Office of the Superintendent of Financial Institutions (OSFI) will affect readvanceable mortgages, specifically those with an outstanding balance that is greater than a 65% loan-to-value (LTV).

Readvanceable mortgages are those with at least two parts to the credit, including an amortization portion and a revolving line of credit. This is referred to as "Combined Loan Plans," or CLPs.

OFSI has stated that "The most significant concern with these products is the readvanceability of credit above the 65% loan-to-value limit."

So, what's changing?

For those who currently have a readvanceable mortgage and when you repay any principal, that money in some cases can be re-borrowed from the line of credit part of the loan.

But, when OFSI's new rules are completely carried out in 2023, any principal payments to your balance above the 65% LTV threshold will go towards reducing the overall balance, and thus the readvanceable borrowing limit until it reaches 65% LTV.

These changes will likewise apply to reverse mortgages and residential mortgages with shared equity features.

OFSI said that the new changes will not affect borrower payments. The new rules will come into effect on October 31 or December 31 for new borrowers, depending on the lenders' fiscal year-end. For those with an existing HELOC, the change will happen on their renewal date if it occurs after the dates above.

What's the impact?

Loans with balances above the 65% LTV threshold currently make up $204 billion of the $1.8 trillion in outstanding residential mortgages. Overall, readvanceable mortgages made up $737 billion of the market as of Q1 2022, according to the Bank of Canada.

OFSI head, Peter Routledge, stated "Our expectations include lenders ensuring that all combined lending product borrowing above a 65% loan-to-value limit will be amortizing and non-readvanceable. In so doing, we lessen the fragility produced when borrowers sustain high LTV ratios beyond contractual amortization periods."

If you currently have a readvanceable mortgage or want to learn more about how these changes may affect your borrowing needs, please reach out to us for more information!

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