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The HELOC Clock Starts Ticking

HELOC-deadlineIf you want a HELOC or readvanceable mortgage equalling 66%-80% of your home value, be ready to act soon.

We’re hearing that some banks may start cutting back on their HELOC lending limits by the end of this month.

These moves relate to OSFI’s new B-20 underwriting guidelines, which require federally regulated lenders to limit new HELOCs to 65% loan-to-value (LTV), from 80% today.

Banks must comply with this new guideline by the end of their fiscal years. That makes the official implementation deadline October 31, 2012 in most cases. But don’t count on lenders waiting until then.

OSFI says that existing HELOC holders will be grandfathered. So if you need a 66%-80% LTV HELOC from a bank, get approved while the getting’s good.

Other key points:

  • Borrowers who modify their HELOC after the rule changes take effect will potentially be subject to the new 65% LTV limit. So make sure you have your HELOC set up exactly the way you want it.
  • HELOCsBorrowers who obtain readvanceable mortgages under the new guidelines can still get them at 80% LTV, but 15% of that will need to be amortizing (i.e., various lenders will still offer you a 65% LTV secured line of credit plus a 15% LTV mortgage, for 80% total)
  • If, under the new regime, you have a readvanceable mortgage with two parts:

  1)  a secured line of credit portion, and

2)  an additional amortizing mortgage portion

…then the mortgage portion will not be readvanceable if the line of credit portion is greater than or equal to 65% of your home value. (Note: Different lenders may have different policies when it comes to readvancing under the new B-20 rules. We’ll report on this further as more information becomes available.)

  • So far, no major lenders have announced HELOC LTV changes in relation to the OSFI guidelines.

For responsible well-qualified borrowers, HELOCs have a variety of productive uses, including:

  • Investment borrowing (using strategies such as the Smith Manoeuvre)
  • Borrowing for education
  • Rental property investment
  • Value-adding home improvements
  • One-time debt consolidation
  • An alternative to higher-rate loans
  • A down payment source for a second property
  • An emergency backup fund

HELOCs can also be used for personal consumption (like the proverbial “TVs, vacations and sailboats”). Hence, for people who can’t control their spending, a HELOC can be one of the worst financial decisions they can make. Those folks should ignore this HELOC deadline.

Rob McLister, CMT