Posted by genieSABRE on Aug 24, 2012
Stricter Lending Rules Stave Off Canadian Housing Bubble

Stricter Lending Rules Stave Off Canadian Housing Bubble

The HELOC Clock Starts Ticking

Source: Hannif Highclass c/o Genie Sabre Realty Inc.
Publish:MY BLOG: Toronto Real Estate: August 24, 2012

Office of the Superintendent of Financial Institutions Canada (OSFI) – the governing body that regulates all financial banks, credit unions, etc. has adopted under its “The Guideline, Residential Mortgage Underwriting Practices and Procedures “ stricter mortgage lending processes. These regulations are designed to slow inflation and limit the amount of capital that potential homeowners can secure when looking to purchase a home.

Most Important the underwriting guidelines, will require federally regulated lenders to limit new Home Equity Line of Credit (HELOC) to 65% loan-to-value (LTV), from 80% today.
In simpler terms – If you wanted to an HELOC – the banks are at present lending at 80% loan-to-value – this will change and will drop down to 60% LTV.

Eg. House Value = $300,000 Existing mortgage= $150,000
As of now you can take an addition loan of 80% LTV = $90,000
In near future, the maximum the banks is 65% LTV = $45,000

Banks must comply with this new guideline by the end of their fiscal years. That makes the official implementation deadline October 31, 2012 in most cases. So far, no major lenders have announced HELOC LTV changes in relation to the OSFI guidelines.

OSFI says that existing HELOC holders will be grandfathered. So if you need a 66%-80% LTV HELOC from a bank, get approved while the getting is good.

Other key points:

Borrowers who modify their HELOC after the rule changes take effect will potentially be subject to the new 65% LTV limit. So make sure you have your HELOC set up exactly the way you want it.

Borrowers who obtain readvance able mortgages under the new guidelines can still get them at 80% LTV, but 15% of that will need to be amortizing (i.e., various lenders will still offer you a 65% LTV secured line of credit plus a 15% LTV mortgage, for 80% total)

If, under the new regime, you have a readvance able mortgage with two parts:
1) a secured line of credit portion, and

2) an additional amortizing mortgage portion

then the mortgage portion will not be readvance able if the line of credit portion is greater than or equal to 65% of your home value. (Note: Different lenders may have different policies when it comes to re advancing under the new B-20 rules.

“ Recent changes to mortgage regulations were widely expected to temper sales and prices in Greater Toronto and Greater Vancouver, and the data released today confirms that,“ said Wayne Moen, CREA President. “ Even so, sales and price trends can be very different from one market to the next, and run counter to national trends. Buyers and sellers should talk to their REALTOR® to understand how the housing market is shaping up in their area. “
“ Some first-time home buyers may have difficulty qualifying for mortgage financing due to shortened amortization periods included in recent changes to mortgage regulations, “ said Gregory Klump, CREA’s Chief Economist “ As the linchpin of the housing market, lower first-time buying activity will have knock-on effects over the rest of the market. It will likely take more time for move-up buyers to sell their current home. “

HELOC – What is this? and who uses it?

A HELOC or Home Equity Line of Credit is secured by the equity in your home. The underwriter of the loan uses your home as collateral to repay the debt in the event of foreclosure. A HELOC can serve a useful purpose, but it is important to use it wisely. Never take out more money than you can afford to pay back especially if it could potentially lead to foreclosure.

Used properly, a HELOC allows you to apply for a loan and then use it only when/if you need it. Unlike many loans, a HELOC doesn’t require you to use it right away. Instead, you can keep the balance available as an emergency fund instead of using high interest credit cards in the event of an emergency.

Would you benefit from a HELOC loan?

Investment borrowing (using strategies such as the Smith Manoeuvre)
Borrowing for education
Rental property investment
Value-adding home improvements
One-time debt consolidation
An alternative to higher-rate loans
A down payment source for a second property
An emergency backup fund

HELOC can also be used for personal consumption (like the proverbial •TV’s, vacations and sailboats •). Hence, for people who can’t control their spending, a HELOC can be one of the worst financial decisions they can make. Those folks should ignore this HELOC deadline.


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