Today, clients with a revolving portion of their mortgage (or collateral mortgage as it’s often referred to) can use or reuse up to 80% loan-to-value as the mortgage is paid down. This is inclusive of both mortgage and Home Equity Line of Credit (HELOC) products.
However, OSFI (Office of the Superintendent of Financial Institutions) has stepped in to change this amid concerns about the persistent outstanding household debt of Canadian households. It’s evident, now, that this consumer debt is leaving borrowers vulnerable during negative economic periods. As of March 2022, there was over $204 billion worth of HELOCs above the 65 percent mark. This number has likely increased significantly since, as homeowners grab at what’s available to service the higher costs of living and investing.
Effective October 31st, 2023 (or December 31st, 2023, depending on the bank’s fiscal year), new Canadian guidelines will limit the amount clients can use/reuse (without seeking a new credit approval) to 65% of the value of their property. This is based on the appraised value of their home on file. If borrowers wish to maximize their borrowing capability to 80% LTV, they will need to submit a refinance request that will require new credit approval and a new appraisal – in other words, they’ll be applying based on today’s qualifications and home prices.
Most banks have revised their Credit Usage section of the collateral mortgage service agreement to reflect the changes and are rolling out notices to their clients. No action is required from borrowers, and their current mortgage and HELOC will remain unchanged in terms of interest rates and payments.
Borrowers who took out a collateral mortgage prior to October 31st, 2012, and have not had another appraisal/re-adjudication/refinance since that time, will not be impacted by this change. If or when these clients do make a change to their existing mortgage, they will be subject to the new guidelines as well.
While this change is not expected to erode the value of your home, it is ultimately reducing borrowing power, which can have an indirect impact on home prices across Canada. It’s not unrealistic to believe that many Canadians rely on their available home equity to make investment purchases. Less access to funds means less funds available to compete in the Canadian market. If enough people are impacted by this removal of liquidity, competition could soften – and prices could follow.
Here is an example to help illustrate:
A couple purchased a home in August of 2017. They paid $700,000 and put 20% down. They sought a mortgage of $560,000 which was registered as a collateral (or step) mortgage. The property was appraised at the time for $700,000.
Since this is a collateral (or step) mortgage, as they pay down the principal on the mortgage, that principal becomes available to them as credit (under a HELOC product).
It’s now 2023, and they have paid down the principal on their mortgage to $490,000. This means that they should have $70,000 available to them to withdraw under the HELOC. And this would be true, were the rules not changing.
However, effective October 31st, 2023 the maximum they can utilize is only 65% of the property value – no longer 80%. The appraisal value that the bank has on file is $700,000 (even though their property is now worth well over $1,000,000).
65% of $700,000 is only $455,000… $455,000 is less than the mortgage balance they currently owe, so they are unable to borrow any additional money unless they do both of the following:
- Get a new appraisal on their home.
- Get a new credit approval to borrow up to 65% of the new appraised value.
There will be many questions about this change, and we encourage you to reach out at your earliest to address it with an expert who can provide throughout guidance and resources. Call us today at (905) 455-5005.