The OFSI recently published an amended report regarding proposed changes to mortgage lending policies in Canada. In the report, they made the following recommendations which are of greatest importance to homeowners and home buyers:
- Continue with their plan to decrease the maximum amount that can be loaned on a home equity line of credit (HELOC) mortgage to 65% of the value of the property.
- Continue with their plans to eliminate cashback mortgage lending.
- Discontinue their stated intention of requiring borrowers to requalify for their mortgages every 5 years.
I will cover my response to each item.
HELOC mortgages will be only be allowed to 65% of property value
I have some mixed feelings about this one. For starters, it does not prevent home owners from getting mortgages for more than 65% loan-to-value (LTV). It only prevents them from getting HELOC mortgages. These changes are supposed to help protect the real estate market and to help ensure Canadians don’t get into debt, so they take away a method that home owners can have an available facility when they need it, and potentially force them to take a credit product where they are forced to use it and will likely result in greater housing debt.
To clarify what I am saying with an example, if someone has a $100,000 HELOC on their property that is unused but they may need at some point, it can be partially used, and it can be paid back at any time without penalty. Most people who have such credit have it in case of emergency or for investment purposes (which helps the economy). If he has to borrow it as a regular mortgage, he may:
- Need to do it as a private second at a high interest rate since he may not be able to refinance in the middle of the term.
- May not borrow it, and could cause a loss of investment in the economy.
- If he borrows it, he may borrow more than he needs in case of an emergency or prudence, so if he really only needs $50,000, then he is borrowing an extra $50,000 and likely just putting it into a savings account. The debt on his house is now $100,000 instead of just $50,000 and he is losing on the spread between the interest rate on the mortgage and the interest received from a savings account. In this scenario, the client is paying to allow the bank borrow money from him essentially interest free. I am sure the banks love this idea.
The fact that borrowers can still borrow with a regular mortgage defeats the whole purpose of this idea and will cause a greater problem than the problem it attempts to solve. It appears to me to be short-sighted, at the very least.