Canada’s primary banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), is introducing crucial changes to
the rules governing specific types of home loans. These adjustments are aimed at ensuring the financial well being of both lenders and borrowers, particularly during times of housing market uncertainty. The new restrictions, set to take effect in late 2023, will have a significant impact on various real estate loans, including reverse mortgages and regular mortgages with a revolving credit line. The fundamental objective of OSFl’s new rules is to safeguard individuals from overextending themselves financially by borrowing excessively against their homes, which could potentially put them at risk.
What Types of Mortgages Are Impacted?
The most significant change is related to something called “combined loans.” These are regular mortgages that come with a revolving line of credit known as a HELOC (Home Equity Line of Credit). With a HELOC, homeowners can borrow money from their home’s equity without a strict repayment schedule, typically only needing to pay the monthly interest on that portion of their loan. The other highlight of these types of loans is that currently as the principal of the mortgage portion is paid down on the mortgage portion, that amount is then available to borrow on the HELOC portion.
How Do These Changes Impact Me as a HELOC Mortgage Holder?
Presently, homeowners can technically borrow up to 80% of their home’s value through such loans. The new rules will come into effect only if the total debt on this type of loan surpasses 65% of the home’s value. When a homeowner’s combined loan surpasses this 65% limit, it will function more like a traditional mortgage. Instead of making interest-only payments, borrowers will be obligated to make regular payments that include both principal (the amount borrowed) and interest until the loan balance falls back below the 65% threshold.
Lenders that offer this product are all handling this transition slightly differently, but most are gradually reducing the limit on the HELOC portion. This measured approach aims to ensure that payments made will steadily bring down the overall loan balance until it aligns with 65% of the home’s value.
How Can I Find Out More?
Because these new restrictions are unique to your HELOC balance and may vary among different lenders, we advise you to get in touch with your broker. They can provide personalized guidance and help you understand the specific details of your how your HELOC will be impacted. As always, our team is here to assist you in navigating these evolving regulations and ensuring your financial security.