The Clock is Ticking on HELOCs

The HELOC Clock Starts Ticking

If you want a HELOC or readvanceable mortgage equalling 66%-80% of your = home value, be ready to act soon.
We're hearing that some banks may start cutting back on their HELOC = lending limits by the end of this month.
These moves relate to OSFI=92s new B-20 = underwriting guidelines, which require federally regulated lenders = to limit new HELOCs to 65% loan-to-value (LTV), from 80% today.
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. But don't count on lenders waiting until then.

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=92s 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 = readvanceable 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 readvanceable mortgage with two = parts:

  1)  a secured line of credit portion, and
  2)  an additional amortizing mortgage portion
=85then the mortgage portion will not be readvanceable 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 = readvancing under the new B-20 rules. We'll report on this further as = more information becomes available.)

• So far, no major lenders have announced HELOC LTV changes in = relation to the OSFI guidelines.

For responsible well-qualified borrowers, HELOCs have a variety of = productive uses, including:

• 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

HELOCs can also be used for personal consumption (like the proverbial = =93TVs, vacations and sailboats=94). Hence, for people who can=92t = control their spending, a HELOC can be one of the worst financial = decisions they can make. Those folks should ignore this HELOC = deadline.

---

Rob McLister, CMT

Feds Reduce Threat Level to Re-Qualifying Borrowers

Office of the Superintendent of Financial Institutions relieves investors of re-qualifying threat
Canadian Real Estate Magazine
Written by  Vernon Clement Jones



It’s good news for homeowners, and, indeed, investors, with the federal banking regulator now clarifying its position on re-qualifying borrowers at renewal -- effectively maintaining the status quo.

“The following provides a brief description of OSFI’s decisions on key issues, which will be reflected in the final Guideline,” writes the regulator in a letter sent to federally-regulated financial institutions Wednesday. “Re-qualification at Renewal – current practice regarding residential mortgage renewals has served FRFIs well. OSFI agrees, for example, that having a good payment record is one of the best indicators of credit worthiness. OSFI, therefore, expects that FRFIs themselves will remain responsible for deciding what level of review to place on borrowers’ qualifications at the time of renewal.”

That’s good news for small investors, say analysts, pointing to their use of personal mortgages to fund acquisitions and their cash flow issues.

The OSFI letter confirms speculation from mortgage brokers and consumer advocacy groups, alike, that the regulator was now prepared to hold its fire on the most contentious component of draft guidelines introduced in early spring and focused on tightening mortgage underwriting standards.

At the same time, the message confirms that OSFI will uphold its guideline reducing the maximum loan-to-value ratio for HELOCs to 65 per cent, although it stopped short of forcing lenders to attach a specific amortization to those lines of credit.

Still many bankers and mortgage brokers have been more concerned about the possibility of lenders having to re-qualify clients at each and every renewal.

The OSFI decision may leave some room for lenders to do just that, however.

"FRFI renewal practices should be articulated in internal policies governing their underwriting of residential mortgage loans," writes OSFI. "FRFIs, however, will be expected to refresh the borrowers’ credit metrics periodically (not necessarily at renewal) so that FRFIs can effectively evaluate their credit risk.”

For the full OSFI letter, click HERE.