HELOC Maximums Reduced to 65% LTV

Home Equity Line of Credit (HELOC) can be a very powerful tool financing your investments. It gives you access to the equity in your properties without actually selling it. Rates are very appealing, in some cases as good as mortgage.

At the moment you can finance up to 85% of your property value through HELOC and use the money to invest other projects. Benefits of HELOC include:

·         Unlike mortgage HELOC is flexible – you can use money when you need it and put it back when you don’t, no penalties or administrative fees.

·         Better yet you can use it for anything you want, like new TV, but hopefully a new investment property.

·         No principal needs to be paid on HELOC, only interest.

However this great vehicle will soon be less accessible. Office of the Superintendent of Financial Institutions Canada (OSFI) obligates federally regulated lenders to limit loan to value ratio to only 65%. Other lenders (such as credit unions) are unusually soon to follow same path.  New rules have to be applied by the end of lender’s fiscal years. That makes the official implementation deadline October 31, 2012 in most cases. But don't count on lenders waiting until then.

OSFI says that existing HELOC holders will be grandfathered. So if you need a 66%-85% LTV HELOC from a bank, get approved now.

Other key points:

• Borrowers who modify their HELOC after the rule changes take effect will potentially be subject to the new 65% LTV limit. So make sure you have your HELOC set up exactly the way you want it.
• Borrowers who obtain readvanceable mortgages under the new guidelines can still get them at 80% LTV, but 15% of that will need to be amortizing (i.e., various lenders will still offer you a 65% LTV secured line of credit plus a 15% LTV mortgage, for 80% total)
• If, under the new regime, you have a readvanceable mortgage with two parts:

  1)  a secured line of credit portion, and

  2)  an additional amortizing mortgage portion

…then the mortgage portion will not bereadvanceable if the line of credit portion is greater than or equal to 65% of your home value. (Note: Different lenders may have different policies when it comes to readvancing under the new rules.)

Let us know if you have any questions on how HELOCs or new rules work!