As rising household debt puts our country’s financial system on edge, new guidelines from the Office of Superintendent of Financial Institutions (OSFI) have taken effect today, November 1st, that will reduce some Canadian homeowners’ borrowing power.
Those who have a Combined Loan Plan should have received a letter from their bank on whether they have been affected by these new changes. Combined Loan Plans are typically mortgage loans with a home equity line of credit (HELOC). As you pay down your mortgage principal each month, that money becomes immediately available in a line of credit up to a certain threshold, which lets borrowers keep their mortgage balance and line of credit at 80% Loan to Value (LTV).
Banks will introduce the new limit between October 31st – December 31st, depending on their fiscal year. The decrease from 80% to 65% will be gradual, with banks having 25 years to transition current HELOC borrowers.
“If you have a mortgage and pay $1,000, your available borrowing limit on your line of credit grows by $1000,” says Ottawa-based mortgage broker Andrew Thake. “But when banks implement the new limit, for that $1,000 payment on your mortgage, your line of credit will only grow by $875.”
This change won’t affect mortgage payments or the price of housing, only the amount of money you can borrow.
Suppose a homeowner renews their mortgage and the total combined LTV exceeds 65%. In that case, payments to the mortgage principal will increase the available funds on the line of credit on a factor lower than the previous 1-1 ratio.
If the total combined LTV is less than or equal to 65%, payments to the mortgage principal will increase the available funds on the line of credit on a 1-1 ratio to a maximum LTV of 65%.
Here is an example of two scenarios provided by MCAP:
| Total combined LTV is less than or equal to 65% | Total combined LTV is greater than 65% |
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The Combined Loan Plan is a great way to provide homeowners with payment options that match their needs and cash flow. Whether they are looking to take on home renovation, make repairs, major purchases, medical emergencies or unexpected expenses that might arise from a job loss. Secured debt, like a HELOC, is an easy way to take care of major expenses with a low-rate line of credit.
If you are curious as to how this will affect your overall finances, feel free to get in touch with me! Or, if you are looking to add a HELOC to your mortgage, you can CLICK HERE to book a quick call to get started!
Trish & The Primex Team