Qualification changes, which some mortgage lenders have adopted, are affecting anyone with a home equity line of credit (HELOC). The new measures are meant to help prevent homeowners with HELOCS from becoming over-extended with debt.
Three major banking institutions have already changed their regulations on qualifying individuals with a home equity line of credit.
What has changed? Currently, most mortgage providers qualify a secured home equity line of credit by the amount outstanding at that time, whereas new regulations look at HELOCs as if they are fully drawn. This can lead to a big difference in how borrowers qualify.
Show us the numbers
For this example, we will assume the client has a home equity line of credit of $200,000 with only $25,000 utilized. The HELOC rate the client has is Prime plus 1.00%.
We would take the outstanding secured HELOC amount of $25,000 and amortize over 25 years at the lender’s posted fixed rate or at the current qualifying rate (currently 5.04%). By this calculation, the lender would assume you have a debt obligation of $150.28/month for this outstanding amount.
With the new qualification, we will take the entirety of the allowable limit of the home equity line of credit, in this case $200,000, and amortize over 25 years at the lender’s posted fixed rate or at the current qualifying rate (currently 5.04%).
By this calculation, the lender would assume you have a debt obligation of $1,202.22/month for this outstanding amount.
Will these changes be coming to more mortgage lenders?
The Office of Superintendent of Financial Institutions (OSFI), Canada’s banking regulator, hasn’t stated any regulation changes to how HELOCs are to be qualified yet. With a couple of the big banks changing qualifications, this could be foreshadowing of more wide-spread regulations. OSFI last made big regulation moves in late 2017 with the introduction of the B-20 rules, which came into effect in January 2018 and drastically reduced what homeowners could qualify for.
If you need a mortgage checkup or are interested in more information on the changes that may affect your mortgage, there is never a better time than the present to give us a call at Centum Mortgage Store, Ltd.!