In a stealthy move by some of the country’s largest lenders, applying for a new mortgage when you’ve got an existing home equity line of credit (HELOC) is about to get a whole lot harder.
Lenders like TD Bank and Merix have been engaged in a behind-the-scenes shakeup of debt-ratio calculation methods.
Under the new rule, lenders will require proof that HELOC owners applying for additional financing, such as a mortgage, can afford a repayment based on their entire HELOC credit limit, regardless of whether or not it’s been used, as opposed to the balance currently owing on the HELOC.
How the new rule works
We can’t look at this change without first looking at something called total debt service ratio (TDS). Banks decide whether you qualify for a mortgage or not based on your TDS. To determine a person’s TDS, the bank will take the sum of their monthly debt payments and divide it by their gross monthly income.
This new rule would add a hypothetical monthly payment to that debt payment sum, which would increase your TDS and, depending on how much that number rises, might disqualify you from getting a mortgage. The CMHC’s TDS ratio limit is 42%.
According to the CMHC, more than 3.1 million Canadians had HELOCs in the first quarter of 2018. This new rule will affect them, especially if HELOC rates rise, which is likely, given that the Bank of Canada just hiked its benchmark rate and HELOCs are tied to it.
This is a solution to something that’s not actually a problem
The banks assert that the system change is all about managing risk, since there’s always a chance that a HELOC owner might use up all of their available credit. TD Bank, which implemented the change on November 5, said to LowestRates.ca in an email:
“Debt service ratios are an important measure of a consumer's ability to manage their financial obligations – particularly in a fluctuating rate environment. We consider a consumer's entire debt obligation, which include the credit they currently hold in addition to any credit they apply for.”
RBC, on the other hand, has had such a policy in place since 2013. In an email to LowestRates.ca, it said:
“RBC reviews every mortgage based on a number of factors, including a client’s credit worthiness and history, and their ability to repay. When evaluating an applicant’s capacity to repay we need to understand their total financial picture. We are unable to see if a HELOC from another financial institution is secured or unsecured, so we assess the client on the assumption that they could draw on the available credit at any time rather than assuming the balance at the time of application will remain unchanged.”
Criticism of the new rules
Shawn Stillman, director and principal broker of Mortgage Outlet, learned of the new system change on November 4. "Mortgage arrears rates are not that drastic,” says Stillman. “So, this is a solution to something that’s not actually a problem.”
Of course, those who have HELOCs without a balance can simply close them to avoid being denied a mortgage they may otherwise qualify for. “They can,” says Stillman, “but why should they need to?” This wouldn’t be an option for anyone carrying a balance already.
“Banks aren’t making this decision," he says. “This is a sneaky move by the government… making an unannounced rule change that’s directed to the banks, and the banks kept it quiet,” says Stillman, who suspects the government discretely introduced the system change because it received so much blowback on the mortgage stress test that was introduced this past January. This way, he says, the blame is on the banks.
Stillman’s been working in this industry for nearly a decade, and he can’t recall a time when banks weren’t incentivizing HELOCs. Many consumers, he says, didn’t even want them. Now many of them will be part of an “unmortgageable” group as a result of this new rule, even if their repayment habits are good. “The more regulations that get put in place,” says Stillman, “is bad for customers."