TD Canada Trust, the largest provider of HELOCs in Canada, on Tuesday became the latest bank to quietly adopt the new qualification rule, joining RBC and at least one other major bank.
“Even though you might have a zero balance, the bank assumes you might use all of your available credit,” McLister wrote.
The change predominantly affects those seeking additional financing for a second home, a rental/investment property or a cottage.
For a typical borrower with a $200,000 HELOC limit, McLister says they will now need to prove they can afford a $1,202 monthly HELOC payment based on today’s rates. That, he adds, would drive a mortgage applicant’s Total Debt Service (TDS) ratio over 50%, well above the maximum HELOC TDS limit of 40–44%.”
The result: “A meaningful minority of Canada’s 3.1 million HELOC holders will no longer qualify for additional financing like they do today,” McLister told CMT. “That means many will have to restructure their HELOCs, incurring additional cost and losing financial flexibility. As always, tighter credit policies are great when the benefits—systemic risk reduction—are greater than the economic loss to consumers. The jury will be out on that for a while to come.”
James Laird, President of CanWise Financial, agrees that treating available credit as utilized credit is a “big deal.”
“Many of the rule changes over the past 10 years have made it really hard to buy a home beyond your primary residence,” he said. “This rule change is focused squarely on that. It has no effect on your owner-occupied residence, but will make it more difficult to purchase a second home or rental property. Many clients will be forced to choose between the security of having a credit facility should they require it, and purchasing that second property.”
Adding that while he does see logic in the policy, Laird says “this will be another hurdle for our industry.”
In its reply to the RateSpy story, TD explained that the debt service ratio change was made “to ensure prudent underwriting guidelines, and reflects concerns around consumers’ abilities to manage debt—particularly in a fluctuating rate environment.” It added, “…the impact (is) limited to a small number of customers that have an existing home equity line of credit and are applying for additional financing.”
Nick Douce, Vice President and Managing Broker of Paragon Mortgage Group, said they received an update from TD on Tuesday morning and that it was the first they had heard of the change.
“There is little industry consultation by the governing bodies on these rule-tightening issues today,” he said.
Douce added that while there is some sense to the change, he believes the impact will be more emotional than financial.
“Faced with ever-tightening regulation and controls by Big Brother (misguided or not) just discourages the population from even venturing into the idea of enriching their lives or financial position by borrowing to invest,” he said. “A few minor qualification tweaks along with the increase in rates over the past 18 months would have been enough to slow things down, especially as real estate is often cyclical in nature anyway.”
Dustan Woodhouse, a broker with DLC Mortgage Experts, added his voice to the feeling that increased regulation and policy changes have moved beyond what’s needed to adequately manage risk in the market.
“It’s overkill piled on top of overkill,” he said. “We are long past worrying about stability of the markets and deep into posturing to please regulators, pundits and politicians.”
The Growing Concern Over HELOCs
There had been signs that HELOCs were becoming the next financial product of concern for banks and regulators.
Speaking at the national mortgage conference in Montreal, Financial Consumer Agency of Canada (FCAC) Commissioner Lucie Tadesco raised concerns about increasingly risky consumer behaviour involving HELOCs.
She drew attention specifically to the fact that a quarter of HELOC holders in Canada are only paying the interest on their HELOCs most months.
“Interestingly, 62% of this group told us that they planned on paying off their HELOCs over five years. This seems overly optimistic, considering that the average HELOC balance is $70,000,” Tedesco said. “Typically, these consumers end up carrying debt for longer periods than they had initially anticipated. They might also slip into patterns of behaviour that trap them on a treadmill of debt”
Bank of Canada Governor Stephen Poloz had also raised concerns about HELOCs during a speech as early as December, when he said some Canadians are using them to dangerously stretch their borrowing limits.
Thanks to a combination of low interest rates, rising home prices and the aggressive marketing of secured lines of credit, HELOC balances reached $230 billion in 2017, up from just $35 billion in 2000 and $186 billion in 2010, according to OSFI figures.
Expect More Banks to Adopt this Policy
The consensus is that the remaining big banks, and others, will likely move to adopt this qualification policy over time.
“I think, by the end of this year or next year, given OSFI’s concern about HELOCs, I think we’re going to see most banks, if not all, do this, as well as lenders that get their funding from major banks,” McLister said.
Laird agreed, adding, “My experience with banks is they usually keep their policies fairly uniform, so I would expect Scotia and BMO to follow suit.”