Houses are thought to be one of the safest investments. By purchasing a home, you are locking in a nest egg that could be very profitable. At the very least, homes can bring back what you put into them. This remains true. What is changing is the big homeownership perk of borrowing against home equity.
Currently, homeowners have the ability to turn the equity in their homes into capital. However, due to a change made by banking regulators, homeowners will have less access to this equity going forward.
What changes are being implemented?
The main tool banking regulators are using is tightening underwriting requirements. This will limit the amount property owners can tap into their home equity.
The most significant changes target combined loans. Combine loans are traditional mortgage loans paired with revolving Home Equity Line of Credit (HELOC). They allow homeowners to dip into the line of credit without needing to repay it on any sort of schedule.
HELOC acts like a revolving line of credit. Instead of receiving a lump sum, you can borrow as much or as little as you need at any time based on your maximum credit limit.
These new regulations will start when a re-advanceable loan exceeds 65% of a home’s price. Currently, owners can borrow up to 80% of such loans. However, the new rules lower it by 15% by forcing borrowers to start repaying some of the principal after exceeding the new threshold.
The change ensures that once the loan’s value exceeds 65% of the home, the loan will operate more like a traditional mortgage. From there, borrowers make payments until the loan reaches below 65%.
New bank requirements
Banks are also altering rules around borrowing against home equity.
Before, banks based decisions on how much borrowers were utilizing their HELOC. Some banks are now taking an individual’s credit limit into consideration as well. This means that each borrower is treated as having borrowed the maximum amount, regardless of how much they have borrowed. With these changes comes inherent risk. These additional financial factors mean some borrowers can no longer qualify for a HELOC, even if they could before.
This may also mean that mortgage term renewals will be altered. Mortgage term renewals may place a higher financial burden on borrowers, regardless of their ability to make payments.
When are these new rules coming into effect?
These new rules won’t be enforced until late 2023. However, according to the Bank of Canada, $200 billion worth of HELOCs is currently outside of that 65%. That amounts to $1.8 trillion of total housing debt.
Canadians will not see their mortgage payment increase until their loan plan is renewed. The changes will not impact new home buyers.
Why are these changes being implemented?
These changes ensure that federally regulated financial systems are prepared for economic risk or shocks.
Top banking regulators, such as banks and The Office of the Superintendent of Financial Institutions (OFSI) are implementing these changes to ensure lenders and borrowers stay on top of loan obligations. These rules are being put in place to protect the housing market during a vulnerable time.
Why it’s important that homeowners are aware of these new rules
Being able to borrow against the equity in your home is one of the biggest perks of owning a home. Many owners rely on that benefit to help with cash flow during various times in their lives. There are many reasons why home equity is a great option.
Some of the benefits of using cash from equity are:
- Manage large unexpected expenses – Whether an emergency renovation or fixing your vehicle, life comes with uncertainty. HELOC can help cover these significant expenses. There aren’t many other places to get access to that amount of money.
- Consolidate debt – Debt consolidation is excellent if you have debt from numerous sources and pay more interest than needed. Debt consolidation is the act of taking out one large debt to pay off all of our other debts. This allows borrowers to pay one interest rate, typically lower than what they were paying previously.
- Use HELOC to invest – Take your home equity line of credit and invest it in something you believe in to make some profit.
- Tax benefits – HELOC interest may be tax deductible.
- Easy to use – Accesingthe funds from your HELOC is as easy as writing a check or swiping the credit card tied to the account.
With these changes coming into effect, homeownership perks just aren’t what they used to be. Homeowners won’t have access to the same amount of funds as they use to. That means they may not be as financially stable as they once were or think they are. It’s important that homeowners take time to understand these rules so that they have a true picture of their finances and can adjust if need be.
Update your financial plan
To create a solid financial plan, start by speaking to your mortgage provider. Get them to show you how these new rules affect your specific situation. From there, you can determine if you can still access enough of the equity in your home for what you need. If there isn’t, talk to your financial advisor to look at other options before you need them.
With the change to home loan rules, lenders and borrowers will need to stay on top of obligations regarding their loans. While this will assist with the country’s housing market’s vulnerable time, it will take its toll on borrowers. Borrowers will no longer be able to utilize HELOC, even if they were applicable previously. This could also see mortgage term renewals place a higher financial burden on borrowers. Are looking to utilize HELOC before it is too late, Consolidated Credit can help. Our team of counsellors and specialists can help navigate this challenging time.