Canadian Banking Authority tightens HELOC mortgage rules to curb rising homeowner debt

The hottest type of household loan financing is in the Canadian Banking Authority’s crossfire, which seeks to curb risky lending as higher interest rates put increased pressure on indebted homeowners.

The product under consideration is Rehabilitation Mortgage – a traditional mortgage Mortgage Including a credit line that expands when the customer pays the principal of the mortgage. The Office of the Superintendent of Financial Institutions (OSFI) calls them Common Mortgage Loan Programs, or “CLPs,” and has been careful about their spread as house prices skyrocket.

In the first two years COVID-19 Mortgages with adjustable interest rates during the pandemic rose by 34 percent and the total value of syndicated loan products amounted to 737 billion dollars in the first quarter of 2022, according to information from the Bank of Canada. This corresponded to 42 per cent of all indexed housing loans, up from 37 per cent in the first quarter of 2020 and 36.5 per cent in the same period in 2019.

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This huge increase caught the attention of OSFI. In a January speech, Chief Police Officer Peter Routledge said convertible mortgages were now “a significant part of Canada’s unsecured mortgages. While acknowledging that they can be useful financial tools when used responsibly, Routledge said they “can also create vulnerabilities” for the financial system and increase the “risk of loss for lenders”.

OSFI said it will announce changes to the rules that apply to these products this spring and noted two key points. One is that the ability to lend home equity after each principal payment has the potential to keep customers stuck in debt.

On the other hand, HELOC can be used to hide cash flow problems that the borrower may face, making it more difficult for lenders and regulators to spot impending problems, especially in times of crisis.

In a speech last November, Routledge suggested that OSFI could force banks to classify convertible mortgages as riskier loans, which would make it more costly for lenders to be on their books as they would have to allocate more capital to each loan. He also said that the regulator could tighten rules on how lenders guarantee these loans.

Bankers and mortgage lenders say the regulator could also curb restrictions on how much homeowners can borrow or force them to recover their HELOC increases.

These changes could help reduce some of the riskiest loans, but it is not clear whether they will significantly reduce demand. Analysts say that banks are likely to pass on higher financing costs for these mortgages by charging customers higher interest rates.

“This will increase the cost to lenders, in which case the pricing policy for these types of products will have to be recalculated for all lenders,” said Maxim Stenser, director of Mortgage Professionals Canada’s real estate interest group. “If there were higher costs involved in creating and maintaining that product, it would be more expensive to provide it to customers, so it is likely that customers will be affected.”

Mortgage refinancing is now a staple for most major lenders. Banks offer it as a powerful lending tool that gives customers easy access to equity in their homes.

A website that introduces the pre-construction line of the homeowner of the Bank of Montreal sums up the concept of a mortgage: “Apply once. Get a little loan. Pay a little. Borrow again. Pay off your mortgage. Get more loans. “

Other banks have labeled their rehabilitation mortgages with clumsy names such as TD’s Home Equity FlexLine and CIBC’s Home Power Plan. Spokesmen for Canada’s five largest banks declined to say the percentage of total mortgages that these products represent.

But regulators say the products also run the risk of allowing customers to spend excess money and accumulate long-term debt that could make them more vulnerable in the event of an economic downturn.

As land prices rose sharply late last year, Routledge said in November that being able to convert mortgages to provide homeowners with more of their loans “could both encourage and help Canadians withstand rising real estate valuations.” This is because homeowners can take out loans against existing home equity loans to buy vacation homes and investments.

Today, there has been a lot of cold in the housing market due to rising mortgage rates. economists Predict that the price of a typical house in Canada could fall by two this year.

This will lower the value of the owner’s assets relative to the size of the mortgage and push them closer to the level of debt that OSFI considers problematic: borrowers who owe their lender more than 65 percent of the value of the home, also known as a loan. to-value (LTV), key measure Used to assess risk in the financial system. A higher ratio means higher indebtedness, which can cause more problems for the financial system.

“This subgroup of borrowers who owe more than 65 percent of LTV represents the greatest risk,” OSFI spokeswoman Carol Sindon said in an email this week.

According to the Central Bank of Canada, borrowers above this threshold accounted for 28 percent of outstanding consolidated loans in the first quarter of this year. In the first quarter of 2020, it was 42 percent.

It is unclear whether subprime mortgages have fallen because house prices have risen sharply or because borrowers have taken out small amounts from their HELOC loans.

Nevertheless, as house prices begin to fall, lower prices will put pressure on homeowners’ LTV rates to rise.

“It is important to keep in mind that these figures are based on the current market value of households and may change as the market moves,” said Seindon. “If house prices fall from those maximum levels, we expect the current permanent value of real estate and the top 65 percent to rise as well.

This means that borrowers can suddenly find themselves with much higher interest rates. If they exceed the 65 per cent permanent limit on the HELOC portion of their syndicated loan, they will have to start paying off part of the HELOC principal. For borrowers where their capabilities have been stretched to the limit, this can cause damage to their finances.

Most HELOCs require customers to pay accrued interest, not the principal of the loan. Because the loans are secured against the borrower’s housing, they generally bear lower interest than unsecured debt.

One of the reasons why banks want to offer repayable mortgages is that they make consumers less likely to look for a competitor. It is easy to transfer a traditional mortgage from one bank to another, but CLP has to repay in full from one of the lenders and re-register with the new bank. This process requires the borrower to pay fees and go through management problems.

It is not clear whether these merged loans pose an imminent risk to the financial system. Data from the Central Bank of Canada show that a large proportion of customers have relatively low debt. As of the first quarter of this year, 41 per cent of syndicated borrowers with long-term value were equal to or less than 50 per cent.

The mortgage industry says OSFI is overreacting. They say that HELOC gives borrowers easy access to equity in their homes at lower interest rates than other loans such as credit cards, personal credit lines and payday loans.

HELOCs are commonly used to renovate homes, invest in rental housing, accumulate more expensive low-interest credit card debt, as well as source of emergency funds if the borrower needs a quick injection.

For example, if a borrower loses their job and has no longer earned income to pay off their mortgage, relying on HELOC can be a cheap, temporary measure to pay off their mortgage while looking for another source of income.

HELOCs prevent far more defaults than they cause. The reason is simple. “When times are tough and you have no extra money, convertible mortgages allow you to continue paying off your mortgage,” said Robert McCallister, mortgage broker and policy maker.

What worries regulators is when temporary measures become permanent solutions, a cycle of borrowing that the Canadian Consumer Finance Agency has described as a “debt spiral at home.”

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