OSFI announced its long-anticipated new measures on the products at the end of June
It was a long time coming, but the end of June saw Canada’s banking regulator finally put in place its plans for new HELOC (home equity line of credit) legislation.
The Office of the Superintendent of Financial Institutions (OSFI) outlined measures it said would “address the risk of persistent, outstanding consumer debt” that can increase lender vulnerability to unexpected economic developments, and placed Combined Loan Plans (CLPs), shared-equity products and reverse mortgages in its crosshairs.
CLPs are conventional mortgages that also include a revolving line of credit that homeowners can access without having to repay on a set schedule.
The regulator said it would require borrowers to start paying back principal if they cross a 65% loan-to-value (LTV) threshold, and expressed its “significant concern” with the re-advanceability of credit above that limit.
“Products structured in this way could lead to greater persistence of outstanding balances and increase risks to lenders and households,” OSFI said in a Press release.
Some have dismissed the new proposals and indicated they’re unlikely to change much, if anything, where HELOCs are concerned. However, one industry expert urged brokers to consider the impact on investor clients who may be using their HELOC as a revolving line of credit, with those borrowers put in an “interesting position” by the changes.
Leah Zlatkin (pictured top), LowestRates.ca expert and licensed mortgage broker, told Canadian Mortgage Professional that investors who were moving money in and out of their HELOC to buy different properties or invest may no longer be able to do so because they’ll be capped at an LTV of 65% on those withdrawals against the total value of the home.
“Once that starts happening, these people are not going to be able to use it as a revolving line of credit,” she said. “So, for brokers, the play is going to be reaching out to your clients and telling them, ‘Hey, your HELOC is not going to work for you to take money out.’”
Clients who might be considering making an investment in home renovations or buying another property in the next six months should be given specific advice, she said: namely, to get rid of the HELOC and lock into a larger mortgage with an LTV of 80% to be able to pull out cash and have it available after the rules change.
“For a lot of mortgage brokers, it’s time to start looking to your database and start calling your clients to make sure that people have access to the funds that they want in the future,” she said, “because HELOCs are not going to be that avenue anymore.”
OSFI said the new rules would come into effect for federally regulated lenders on October 31, 2023, if their fiscal year ends in October, while those whose fiscal year comes to a close at the end of December would see an implementation date of December 31 next year.
Combined loan plans with an LTV of more than 65% account for about $204 billion of the $1.8 trillion total outstanding residential mortgage debt in Canada, the regulator said, and it indicated that it was changing its approach to those products as they grew in scope and popularity.
“CLPs are an innovative product that have become the predominant uninsured real estate secured lending (RESL) offering, and they can provide great value to Canadians,” OSFI noted. “As their structures evolve, so too must our approach and treatment of such exposures.”
The regulator’s superintendent, Peter Routledge, has frequently sounded the alarm on rising HELOC usage, noting its potential to cause problems for regulators in attempting to assess consumer credit conditions.
The use of products such as HELOCs “can lead to greater and more persistent outstanding principal balances, increasing risk of loss to lenders,” Routledge told BNN Bloomberg last year, as well as making it easier for borrowers to “manage financial distress by drawing on their lines of credit to make mortgage payments.”
In its Annual Risk Outlook for the 2022-23 fiscal year, OSFI identified huge home price appreciation and an increase in highly leveraged borrowers as developments that “[increase] the systemic exposure to a housing price correction.”
It said it would introduce “prudent limits and other tailored risk management approaches” for CLPs to ensure the ability of lenders to address the credit needs of borrowers.