New Rules for Second Mortgages in Canada

The mortgage world is abuzz with new information regarding getting additional financing for those who have a HELOC. Some of the Big Six banks have adopted the policy as of recent update. This means that those who have a HELOC will now have to prove that they are capable of paying the theoretical monthly payment based on their HELOC limit and not just the minimum required based on what they actually use.

Impact of HELOC Changes

The largest provider of HELOCs in Canada, TD Canada Trust, have also adopted the new changes, joining some other major banks including RBC. Rob McLister of RateSpy.com says that with these changes, the banks will assume that you’ve used up all your credit despite having zero balance. This change will have a significant effect on those who may want to get additional financing if they already have a HELOC.

McLister adds that this new development means that someone with a HELOC limit of $200,000 will now have to prove that he or she can afford to pay a $1,202 HELOC payment on a monthly basis. This translates to a sizable number of Canada’s 3.1 million HELOC holders now deemed unqualified to get additional financing like some can still do today.

Industry Reacts to Changes

In view of the above, some may need to restructure their HELOCs and have to incur additional fees as well as possibly lose financial flexibility. Industry insiders like CanWise Financial President James Laird agree that banks treating available credit as used credit is a big change. More so that many of the mortgage changes in the past 10 years have made purchasing another home quite difficult for those who just have a primary residence. With these changes, some may even be forced to choose between purchasing a second property or having a credit facility they can use when needed.

Although the change will not have the same effect everyone, and really only disadvantage those who want to get additional financing, it is alarming that industry experts were not consulted before new rules were introduced.

Emotional Effect on People

Industry insiders think that the change will have a bigger emotional than financial impact on people. Tighter regulations and controls may discourage people to venture into improving their lives by borrowing and investing. Some think that a few minor policy changes would have had a better outcome than the new changes since real estate trends have a cyclical nature, with some industry insiders dubbing the most recent change as “an overkill piled on top of an overkill” saying that the mortgage industry is past worrying about market stability and is now just posturing to please politicians, pundits, and regulators.

Concern Over HELOCs

FCAC Commissioner Lucie Tadesco (FCAC stands for Financial Consumer Agency of Canada) raised concerns about the behaviour of those who have HELOCs, most of whom are just paying for their interest. The main risk is that they may run themselves deeper into debt and may not be able to get out of it.

Are you concerned about the new development shared above? Contact us so we can help you assess what financial options may be best for your circumstances and needs if you already have a HELOC or thinking of getting a second mortgage in Canada.