As rising household debt puts our country’s financial system on edge, new guidelines from the Office of the Superintendent of Financial Institutions (OSFI) are about to reduce some Canadian homeowners’ borrowing power.
The following changes will take effect at the end of 2023:
- The maximum loan-to-value (LTV) limit for what OSFI calls Combined Loan Plans, will be reduced from 80% to 65%. Combined Loan Plans are more commonly referred to in our industry as re-advanceable mortgages because they include Home-Equity-Lines-of-Credit (HELOC’s). This is based on the appraised value of their home on file.
- The maximum LTV limit for reverse mortgages will be capped at 65%.
Here are some additional details about this coming change:
- The new re-advanceable limit will be enforced at the end of each federally regulated lender’s 2023 fiscal year, which will be either October 31st or December 31st. While we expect that not all lenders will implement the change at the same time, we would expect some to start applying the new rule ahead of any official deadline.
- Borrowers will not be impacted until their renewal date and only after their lender has implemented the change. Then, if their combined mortgage + HELOC balance is over the LTV limit of 65%, any excess will need to be added to the mortgage portion of their loan.
- This change will only affect borrowers with re-advanceable mortgages from federally regulated lenders, who fall under OSFI’s jurisdiction. It is not yet clear whether borrowers who have loans with provincially regulated lenders, such as Credit Unions, will be affected.
- OSFI estimates that about 1 out of 10 borrowers will need to have HELOC adjustments at their renewal date, due to the new rule change.
Will this impact me?
Here is an example to illustrate:
A couple purchase a home in August 2017. They paid $700,000 and put 20% down. They got a mortgage of $560,000, which was registered as a collateral (STEP) mortgage. The property was appraised at the time for $700,000.
Since this is a collateral (STEP) mortgage, as they pay down the principal on the mortgage, that principal becomes available to them as a credit under a HELOC product.
This year 2023, they have paid down the principal on their mortgage to $490,000. This means that they should have $70,000 available to them to withdraw under the HELOC. And this would be true, if the rules did not change.
Effective October 31, 2023, the maximum they can utilize is only 65% of the property value – no longer 80%. The appraisal value that the bank has on file is $700,000 (even though the property is now worth well over $1,000,000).
65% or $700,000 is only $455,000… $455,000 is less than the mortgage balance they currently owe, so they are unable to borrow any additional money unless they do both of the following:
- Get a new appraisal on their home
- Get a new credit approval to borrow up to 65% or the NEW appraised value.
We encourage you to reach out to us, if you think this change will have an impact on you.
Original article: www.cmsmortgages.ca
