One of the proposed mortgage rule changes coming down the pipe is lower limits on Home Equity Lines of Credit (HELOC’s). Earlier this year the Department of Finance not only lowered maximum amortizations and restricted the limits on mortgage refinances, they also initiated several mortgage rule changes for federally regulated financial institutions. Although many of the proposals were discarded, a couple of significant changes are nearing implementation, one of which is lower limits on HELOC’s.
Not long ago CMHC would insure a HELOC to 90% of the value of your home, but when the insurers stopped supporting that product the banks were left with a maximum limit of 80%. Any loan under 80% of the value of your home is considered recoverable and does not need mortgage insurance.
With the federal government’s mission to lower Canadian debt levels they’ve set their sights on lowering our credit limits. Under the new rules the maximum credit limit will be restricted to 65% of the value of your home. For a $400,000 home that’s $60,000 less room to maneuver.
The good news is that you can still access the equity in your home to 80% of its value, but you’ll have to refinance your home to do it. Although there are costs (about $750) associated with a refinance, they will typically be off-set by lower interest rates. In today’s market you can typically save 1.0% annually by picking a closed term variable rate mortgage over a HELOC. On a $100,000 loan that’s an annual savings of $1,000.
At the end of the day this rule change won’t hurt us but will in fact save us some money by forcing us to take closed term mortgages. I’m not sure this is what the Department of Finance intended but Canadians will find a way to borrow the money they need despite this rule change.