Homeowners looking to take out a home equity line of credit will find their borrowing power slashed as the National Bank enforced a 65 per cent LTV cap which takes effect today.
The limit follows July’s sweeping mortgage rule changes, which included decreasing amortization periods for CMHC-backed mortgages to 25 years, and limiting maximum loan to value at 80 per cent.
Those who filed their HELOC applications prior to today’s rule enforcement need not worry however – all existing applications will be honoured at the old 80 per cent LTV limit, given the file funds before November 30th, 2012. Anything funding beyond that date will be based on the new 65 per cent limit, with no exceptions.
Credit requirements to qualify for HELOCs (also referred to as All In Ones) will not be changing.
Why Are These Changes Needed?
These latest measures to limit consumers’ borrowing power are just the latest in government efforts to stem growing household debt. Just as in the case of limited amortization for high-ratio mortgages, these rules are put in place to ensure Canadians aren’t biting off more than they can chew – and to avoid a U.S.-style debt crisis as a result. This may be small consolation for homeowners, though, who are now faced with less flexibility when it comes to their financing options.
Mitigating the Risk
HELOCs were targeted for change because they’re viewed as a riskier product by nature. As they’re considered to be revolving (with funds available at any time to the borrower), they’re not subjected to an amortization period, meaning the bank can’t pinpoint when they’ll be repaid in full. They’re also not eligible for mortgage default insurance, so if the borrower fails on the loan, the bank is absorbing the loss. Due to these risk factors, and as interest-only payments are another fundamental feature of HELOCs, the 65 per cent cap has been established as a margin of safety.
How Will This Affect Your Financing?
The National Bank provided this breakdown for brokers when determining their clients’ financing options:
For example, let’s say a client wants their All in One at 65 per cent, they have a mortgage with an 80 per cent LTV, and their property value is $100,000. Their approved AIO limit would be $80,000 (the 80 per cent LTV), and their maximum re-advanceable limit (their ability to increase their line of credit as they make payments toward their original mortgage principal) would be $65,000. The minimum portion required for their fixed or variable rate mortgage would be $15,000 (80 per cent – 65 per cent x $100,000), and their non re-advanceable limit within the All in One would be $15,000.