Written by 4:07 PM Government and Regulation • 89 Comments Views: 3

HELOC LTVs Could Drop From 80% to 65%

65-percent-ltvThere’s a good chance we might see new restrictions on HELOCs, possibly within the year.

Last week, Canada’s top banking regulator Julie Dickson explained why to BNN:

“We started to see [HELOCs] being used as a substitute for a mortgage. Instead of having a mortgage on a house, you had a HELOC only, and that is not what these HELOCs were designed for originally. That’s why we suggested in the guideline strongly that there be a loan-to-value ratio of a maximum of 65%.”

Julie-Dickson-OSFI“We want the (underwriting) practices at the banks buttoned down,” Dickson added, saying that some financial institutions were not following underwriting policies “to a T.”

As with OSFI’s other pending mortgage guidelines, the new 65% LTV HELOC change is up for public comment until May 1.

The Downside…

If OSFI were to impose this 65% LTV limit on all borrowers (regardless of qualifications), some would view it as one of the most over-reaching consumer lending rules OSFI has enacted; painting all borrowers—strong and weak, responsible and overleveraged—with the same brush. Hopefully exceptions will be made for strong borrowers.

It’s vital to note that HELOCs support a host of valid uses. Many people rely on them for investing purposes, educational borrowing, contingency funds, value-added renovations, etc. Moreover, unlike high-ratio mortgages, HELOCs present no taxpayer risk because they’re not backed by the government. They also impose minimal insolvency risk to banks, to the extent that borrowers are well-qualified and maintain 20%+ equity.

On a related note, OSFI’s draft guidelines suggest it might also require federally regulated institutions to limit interest-only periods on HELOCs to five years. This would be a senseless restriction for people who use HELOCs for retirement planning. In such strategies (e.g., the Smith Manoeuvre), interest-only payments and 80% LTVs are sometimes essential. In these cases, HELOC borrowing is generally offset by the income-generating assets purchased with those funds.

Other Comments…

Regarding the recent 2.99% mortgage “sales,” Dickson said it is “very important” to make sure consumers “can not only pay a 2.99% (rate) but can actually pay the 5-year Bank of Canada posted rate.” It’s not a coincidence then that OSFI’s proposed guidelines talk about using the 5-year posted rate to qualify a much broader range of borrowers.

Dickson refused to answer questions on whether a reduction in CMHC portfolio insurance would create challenges for banks.

BNN interviewer Howard Green also tried to get her to comment on whether bankers might be afraid to speak out against over-regulation because of retribution from regulators and examiners. Dickson dismissed that as being a material issue in Canada. Some in the industry, however, would certainly differ with her on that point.

Rob McLister, CMT

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Last modified: April 29, 2014

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