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Part 2 of OSFI’s new mortgage underwriting rules announced

Hot topics this week are all the govt changes to mortgage lending…  but before we get into the bad news, I thought I’d start with some positive news…  Interest rates are still at all time lows….  if you have a mortgage or will be getting one soon, today’s rates are lower than ever before…  That means more money in your pocket!   We don’t seem to hear enough about that…

Okay, now for the update…Remember, these changes will affect ALL Federally regulated financial institutions….BUT they won’t affect MOST CREDIT UNIONS and other Lenders..

Yesterday we got a double whammy…  First the Federal Department of Finance announced changes to CMHC insured mortgages.… And later that day, OSFI announced Part 2 of their changes to Residential Mortgage Underwriting Practices and Procedures, better known as RMUP… but I prefer RUMP because that’s exactly where most of us will be feeling the effects of these changes…

The timing of all this tightening puzzles most of us in the mortgage industry.   Canada has been the envy of the world when it comes to our mortgage underwriting practices… The govt seems to be getting more into credit underwriting and procedures than ever before… And yet they have not given us any true data or reason for these changes….

Nevertheless, it’s important to keep up to date as these changes will affect us all.  Part 1 of changes were announced earlier this month through a Draft update on June 6th..   And here are the details of the final changes which come into effect later this year… there is a lot of text in the final draft but we are only focusing on the changes that will have the greatest impact on us:

  • Credit checks should be done more often.. minimum credit scores should not solely relied up to determine a borrower’s credit worthiness.
  • Home Equity Lines of Credit will be limited to 65% loan to value, down from the current 80% loan to value. (still not sure if there will be any grandfathering of existing lines but my guess is no)
  • there is more wording with regards to Lender’s Senior Management having more minimum reporting… (this looked like make-work stuff to me as most Lenders have tons of reporting).
  • Cash-back mortgages are gone (no big deal here…. very few of these products were ever used by us ‘irresponsible Canadians’… )
  • Self-employed individuals will be required to provide and pass an ‘income reasonability’ test… (these already exist with most Lenders)
  • Lenders should use the 5 yr fixed contract rate or the Bank Posted rate when qualifying for Variable rate products…even conventional mortgages… (again, nothing new here.. most Lenders are doing this already….yawn)

Who can blame you if you if you’re having trouble keeping up with all these changes to mortgage rules and lending policies.  We must question the purpose of these changes… little to no proof has been presented with regards to why the govt feels these changes are needed… and the timing may come back to bite them in the RUMP!   Some experts are making the argument that the govt’s attempt to avert a major housing downturn, could actually be the cause of it…..let’s hope not.. only time will tell.

I question why the govt is so focused on the estimated $1trillion residential mortgage market, when we have little or no rules when it comes to the other $500billion of non-real estate debt such as credit cards, loans and lines of credit.   Why is it okay to buy a car with $0 money down or okay to make NO payments for 6 months or 1 year, with interest rates of 8%, 18% and 28%, but if you want to buy or refinance your home, you better be prepared to jump through several hoops?   Can you say, ‘I need to refocus my energy and efforts’?

THE GOOD NEWS

Mortgage Brokers will be much busier with these new changes.   Your traditional Bank and ‘A’ Lender WILL NOT be able to provide the same financing as before…. BUT there are several other Lenders that are ready to fill the gap… including Credit Unions and other non-bank Lenders…..   We could see the small Lenders grow with these changes…  As always, feel free to contact me if you have any questions or need clarification.

Steve Garganis

Govt to cut Secured lines of credit to 65% loan to value…

Thursday’s speech by OSFI head, Julie Dickson, at the Toronto Board of Trade, indicates it’s a done deal.  Secured lines of Credit will be capped to a maximum 65% of the value of your home.  “…the guideline does set out some firm rules that all institutions will need to adhere to – specifically that home equity lines of credit – or HELOCS – can have a loan to value ratio no greater than 65%….”

WE’RE MAKING SOME CHANGES…. I MEAN, WE ARE PROPOSING SOME CHANGES…

It was only a few weeks ago that OSFI issued a Draft B-20 guideline, a guideline that is filled with radical changes to mortgage lending rules and policies.    It was supposed to be up for discussion, with a May 1st deadline…. So much for discussion…. it appears the decision was made already according to Ms. Dickson’s speech today…. here’s a copy of that speech… April 5 2012 remarks by Julie Dickson.

90%, 80% AND NOW 65%???… WHEN DOES IT END?

Remember 2007?  It was just a few years ago that CMHC was offering 100% loan to value, interest only payment mortgages.  Back then it was good to borrow at these levels…. And HELOC’s could be had for up to 90% LTV.  Over the past few years, the govt has tightened up mortgage rules in an attempt to reduce access to credit.    Mortgages were amortized for 40 years, then cut back to 35 and now 30 years..  But now the govt believes they need to step in again and limit access to your equity by reducing the Loan to Value limit to just 65%….   I looked back to some historical lending policies and couldn’t find a time when the govt ever imposed a limit of just 65%.   It is unheard of! And it’s going to have a big effect.

SO WHAT’S THE PROBLEM?

OSFI is finding a solution to a problem that doesn’t exist.   I don’t think they realize that Banks have pushed borrowers into lines of credit for years now, as a way of providing easier access to the equity in their homes.    Canadians aren’t buying new TVs or new cars or other luxury items… they are using the equity to improve their net worth by buying investments.   Why is this a bad thing?   Are our defaults up?  NO!  Then what is the problem….?

WHO WILL THIS AFFECT AND HOW?

If you are a self-employed person and ever tried to get a business loan from the Bank, then you know how difficult it can be to get an approval… but even if you do, the repayment terms and interest costs could be a hard stop.   End result is that business idea could remain just that… an idea that never got launched.   One of the more popular alternatives was to access cheap money by borrowing, against the equity in your home.  Mortgages can be great but if you need to borrow, repay and borrow again, then a mortgage can have costly registration fees and penalties.  But through a HELOC,  the repayment terms are great and it’s also a much lower rate of interest than any business credit facility.

Borrowing to invest isn’t anything new.  A HELOC allows you to access YOUR equity at preferred rates.   How about buying a second home or a rental property?  You could use the equity in your home to help with the purchase and HELOCs give a separate accounting which makes reporting to Revcan much easier.

How about borrowing for your child’s education?   Are we going to force Canadians to refinance their mortgages in order access cheap money?   I’m sure the BIG SIX Banks will love to see you break your mortgage and pay their infamous penalties.

END RESULT

Get ready, because you are about to see us pushed into higher interest, unsecured lines of credit (oh yeah, there wasn’t any mention of reviewing these lending policies… that’s because NONE exist!).

Which debt would you pay last…. a mortgage, a secured line of credit or a credit card or unsecured line of credit?    Obviously, it’s the unsecured debts would be last on our list… we will always pay for the roof over our heads…. which is why the defaults are still very low and within very acceptable levels.

We are going to see many Canadians discouraged from investing.. they won’t want to go through the trouble of borrowing with a mortgage…  Congratulations OSFI, you’ve made borrowing more expensive….you’ve made investing for our future tougher than it has to be.

The WINNERS… the BANK…. The LOSERS… you and me, the average Canadian…!

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