12 November 2018

It’s quite a silent rule change, and OSFI hasn’t taken the responsibility for it so far.

This decision will definitely reduce the activity at cottage, second-home and rental markets. It will not be a market crash, but each policy change increases the pressure on real estate prices.

If you are applying for a new HELOC, all the banks will “stress test” you on the HELOC credit limit. It means they will add a theoretical payment to your application, based on the government’s benchmark posted rate (today it’s 5.34%) or your contract rate plus 2% (it’s about 6.45%) – they choose the bigger one. This scheme has already been working, so it’s not going to change.

In case you decide to renew your mortgage, you will not be affected either. But those who want to get a new mortgage and keep their HELOC will take the hit.

For instance, borrowers with an average $200,000 HELOC will be required to prove they can afford a $1,202 HELOC payment (based on the current rates). As a result, borrowers’ debt ratio will exceed the typical lender’s limits.

For now, only few lenders have applied this change, but all major banks will likely follow the example by the next year, and other lenders that receive their funding from big banks will also join.

Those who have HELOCs and who want to purchase one more property, need to do the following:

• Find a lender which doesn’t use this policy
• Decrease their HELOC limit in order to pass the stress test successfully
• Lock in their HELOC to an amortizing mortgage. It’s not a good option if you want to pay off the debt without penalty and quickly re-borrow in the future
• Close the HELOC.

In case you’re planning to buy a second property and keep your HELOC, it’s better to do it before year-end. However, don’t get more debts than you can handle just because of the new rules, as you may be targeted by the stricter policy.