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

  1. None of these options would require 80% HELOC on your property if you are rational:
    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

  2. Nonsense. If someone is borrowing for a good reason and/or has a mortgage taking up equity in 1st position, they might need an 80% loan to value HELOC.

  3. MK.. you don’t need 80% of the value of your house for the things listed..
    VJ, nonsense what you say… sorry but I haven’t seen a situation like you describe in my circle of friends.. and believe me… they do very good….what you describe in 90% of the cases is bad… I don’t have time to educate you here but I guess you know also.. maybe you depend on people borrowing money if you have this idea. That era is gone…. It was a good idea in the past but not anymore.

  4. I employ the Smith Manoeuvre and it has worked great. Frankly I’m worried about this 65% rule. Our mortgage and HELOC combined are currently 79% of our house value.
    It seems like an injustice to prevent people from using 80% of their home equity to build a better retirement. In our case, we are a 2-income family that can pay the mortgage with just one of our incomes. We have stable jobs, credit scores near 800 and have never missed a payment. Can someone explain the logic in depriving families like us from borrowing against our own equity? It’s not like we’re blowing it on sportscars and swimming pools.

  5. Rob, great post as always. HSBC has started to requalify clients that hold secured lines of credit. They are fully qualifying the deal after the 5 year limit, including the value of the home. I have seen clients reduced to 65% of the current value of the home on the line of credit and termed out for any mortgage balance above. I think consumers and Brokers need to be aware and take proactive steps to reduce the loan to value before the Banks become heavy handed. A line of credit is still a demand loan so with B-20 all Lenders are setting their own standards. I am also curious for any feed back on the secured seconds held by CIBC,TD etc and how they will be handled.

  6. I wonder about TD as well.. as it stands my TD LOC is approved for ~60% of my municipal assessment value, which may or may not be relevant. I’ll wait and see what TD says, as I only use 2/3rds of my LOC anyways for real estate investment purposes.

  7. Sorry but your “circle of friends” are not representative of the population. I notice you’re now qualifying your statement to imply that 10% of the cases are not “bad.” Let’s face it, you have no clue what percentage of HELOC borrowers use debt for “good” or “bad” reasons.

  8. >>> 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.
    Ha – among my circle of acquaintances, those are often the first to extract and spend all their equity. It might start with good intentions – for example, credit card consolidation with a commitment to spend carefully going forward. But before you know it, they’re back at the shopping mall recharging the plastic. If they do ignore the HELOC deadline, it’s only because they’re already over 79% LTV

  9. And what about the families that do blow it all on sports cars and swimming pools – then end up broken by the slightest financial headwind (not to mention the creditors and/or taxpayers that have to eat the loss)? Would you rather 1) pay to support that family at the breadline and subsidize their loss through your tax dollars or 2) prevent the family from over leveraging themselves to begin with even if you made a few bucks less?
    Like it or not, you are your brother’s keeper.

  10. Now you’re thinking wjk! Let’s restrict everything that SOME people misuse.
    While we’re at it, let’s ban kitchen knives, cars and rope. We don’t want our ‘brothers’ getting hurt. We’ll find some other way to cut a tomato, get to work and tie things down.

  11. Hi 35, Appreciate the post. That’s the first I’ve heard of this so I’ll look into it. OSFI’s position has been clear in that existing HELOC holders would not be required (by B-20) to reduce their LTVs, assuming no changes were being made to the HELOC. But, as you say, lenders can always set their own individual policies. Cheers…

  12. I like to think I’m rational. This is my scenario.
    $300,000 – House
    $195,000 – Mortgage
    $45,000 – HELOC for Investments
    My Homeline is 80% loan-2-value. My mortgage is not backed by CMHC, I have a goog job, savings and 810 credit. I don’t see a problem with this whatsoever.

  13. Non productive debt? not sure what you mean? Invest into MF? I’m talking about interest only min options at prime + getting access to principal that you paid down if required.

  14. Your “circle of acquaintances” may or may not resemble a representative sample. Either way, the tendencies you describe cannot be applied to the majority of Canadian borrowers with any degree of certainty.

  15. Umm, Smith Manoeuvre explicitly suggests to max out your HELOC @ 80% to get maximum tax-efficiency and long-term growth. Smith Manoeuvre is perfectly rational if you’re a savvy investor.

  16. In follow up to the above post, HSBC’s official comment is as follows:
    “We have not made any changes to our HELOC program for existing advances to our customers. In due course we will be restricting new advances under our HELOC product to 65 per cent loan to value ratio in compliance with the new OSFI guidelines.”

  17. Rob,Thanks for the follow up with HSBC, we have had several clients contact us and we have provided HSBC will financial documents for clients personally. The files were all o/s for at least 5 years and had made lump sum payments, they were not marginal borrowers. People have to be prepared that their line of credit is not likely to remain as interst only, there will be a required principal reduction depending on the individual lenders.
    Rob, have you thought about a column on the fact that the lenders can now see mortgages reporting but as professionals, Brokers cannot view the information? I think this would be a valuable discussion. Thanks for your knowledge and positive impact on the industry.

  18. There is no logic. Politicians and the 9-to-5 rule-making drones at OSFI have decided that a minority of us can’t borrow responsibly. They are making the majority of us suffer because they’re too lazy and short sighted to make rules targeted at just the risky people.

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