A new rule change may make it a lot tougher for those who have a HELOC in Canada to get a second mortgage. Just recently, Toronto-Dominion Bank, the leading HELOC provider in Canada, just changed their policy and are now requiring those who have applications for other financing methods to prove that they are capable of paying their HELOC based on reaching the theoretical monthly limit and not on how much the actual balance is. This new policy is currently being implemented by some lenders, including the Royal Bank of Canada.
Small Change, Big Changes
As of present time, OSFI, or the Office of the Superintendent of Financial Institutions has not yet directly claimed responsibility for the recent changes although they are Canada’s banking regulator. Industry experts are saying that this change will have a significant impact on the second home and rental markets, not causing a crash of the market but will surely add extra weight on home prices.
What This Means
If you’re thinking of getting a HELOC or new loan in the future, you should be ready for the banks subjecting you on a stress test, testing you on a HELOC credit limit that you can afford. They’ll add an assumed payment to your mortgage application which will be based on the government’s benchmark
If you are getting a new HELOC, all the banks will “stress test” you on the HELOC credit limit. In other words, they’ll add an assumed payment to your mortgage application, based on the greater of the lender’s contract rate or the government’s benchmark posted rate. No impact will be felt if you’re merely renewing mortgage as well. Only those who have an existing HELOC and getting an additional mortgage will feel the hit.
With the new policy, a borrower who has a HELOC of $200,000 will have to prove that he or she can pay a monthly HELOC payment of $1,202 based on current rates. This can cause individual debt ratio to skyrocket beyond lenders’ maximum limits.
The good news today is only a few lenders have applied the policy so far although some more major banks will surely implement the change come 2019.
The banking industry makes a lot of money from HELOCs. It is said that borrowers do not apply for a HELOC, they are typically sold a HELOC if they are deemed credit-worthy. HELOCs undoubtedly increase bank profits and banks often build fences around borrowers when it is time for renewal, making borrowers pay more if they want to switch lenders. Banks also try to approve those with a HELOC application for the maximum amount, because the more borrowers use, the more interest they can charge. Some industry insiders now deem the actions quite shady since the usual marketing spiel is that HELOCs don’t have a huge impact on borrowers and now the borrowers are kind of trapped because of new developments.
If you want to retain your HELOC and qualify for a second mortgage to buy another property or to finance a home renovation, know that the recent changes may have an effect on you but some lenders may be easier to talk to than banks. Contact us and we’ll help you get a second mortgage.