Thinking about sprucing up the homestead?
The usual way to finance improvements to your home is to borrow against the equity in the property. This is done via a home equity line of credit (HELOC). The loan uses your house as collateral and allows you to borrow up to a predetermined amount at a much lower interest rate. However, as some of you may remember the government announced over a year ago, that it would no longer insure these loans, requiring banks to assume the full risk of lending. This is when the requirement came in that you could not exceed 80% LTV (Loan to Value) of your home. The OSFI (Office of Superintendent of Financial institutions) made a new announcement in June that the 80% was going to be reduced to 65% LTV (Loan to Value). The dead line for all federally regulated banks is by the end of their fiscal year, in most cases this is October 31st, 2012… However, we have already started to see some banks implement these changes…
This shift will have an impact on many Canadian households, because lenders will be more stringent in their money lending practices. Without the availability of using the government-backed HELOC option, many homeowners will have to use money from their savings, obtain an unsecured line of credit with a higher interest rate or postpone the project altogether.
HELOCs have become popular over the past 10 years, and their growth has outpaced mortgage debt. However, because the money is easy to access, many consumers use the loans as their own bottomless piggy bank. It’s these homeowners the government is trying to reign in. And it makes sense because, in the long run, the result will be less household debt and healthier balance sheets.
For homeowners who use their line of credits as a safety net, or use them sparingly and know they can pay them back within a reasonable time, the new rules won’t have an impact. For others, it will help curb chronic debt accumulation and put them in a better financial position. HELOCs are still available and interest rates vary…
Have a great long weekend everyone!
Guy Ward is a Mortgage Associate in Calgary, Alberta with TMG (The Mortgage Group Alberta).