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Do You Think the HELOC Rules Being Adopted by Many Banks Make Sense?

A new policy affecting Home Equity Line of Credit (HELOC) rules recently came into effect across several of Canada’s Big Six banks.

The policy requires applicants to prove they can afford a monthly HELOC payment based on the limit of that HELOC, rather than the amount that has actually been used, according to Canadian Mortgage Trends.

Even though an applicant might have a zero balance, with this policy the lending bank assumes that the applicant could use all of their available credit – regardless of the balance.

The borrowers most affected by this new change are those who are seeking financing for a second home – such as a rental property or a cottage.

RateSpy founder Rob McLister broke down the changes:

  • A typical borrower with a $200,000 HELOC limit would now need to prove they can afford a $1,202 monthly HELOC payment based on today’s rates.
  • This would drive a mortgage applicant’s Total Debt Service (TDS) ratio over 50% – going above the maximum HELOC TDS limit of 40% to 44%.

James Laird, President of CanWise Financial, told Canadian Mortgage Trends that this new HELOC policy is a “big deal.”

“Many of the rule changes over the past 10 years have made it really hard to buy a home beyond your primary residence,” Laird said.

“This rule change is focused squarely on that. It has no effect on your owner-occupied residence but will make it more difficult to purchase a second home or rental property. Many clients will be forced to choose between the security of having a credit facility should they require it and purchasing that second property.”

TD Canada Trust, one of the banks that has adopted the HELOC policy, spoke to Global News about the change.

“Debt service ratios are an important measure of a consumer’s ability to manage their financial obligations and reflect industry concerns around debt manageability — particularly in a fluctuating rate environment,” TD told Global News.

“We consider a consumer’s entire debt obligation, which include the available lines of credit they currently hold (whether at TD or another institution) in addition to any credit they apply for.”

It added, “…the impact (is) limited to a small number of customers that have an existing home equity line of credit and are applying for additional financing.”

A report by the Financial Consumer Agency of Canada (FCAC) shows that, as of 2016, Canadians were holding roughly three million HELOCs with an aggregate balance of $211 billion.

Global News reported that according to quarterly financial statements from the big six banks, TD has by far the largest HELOC balance.

Does treating available credit as used credit make sense? Share with us what you think. Purview is on Twitter, Facebook, and LinkedIn.

Purview can help mortgage lenders mitigate risk with HELOC loans and other mortgage products. Access our tools by calling 1-855-787-8439 or visiting www.purview.ca.

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