Finance Minister Jim Flaherty today announced the a set of measures that he said aimed to “ensure stability and economic certainty in Canada’s housing market”. The measures included reducing the amortization on new high-value mortgages to 30 years, reducing the maximum refinancing amount to 85 percent of a home’s value and withdrawing government insurance backing on secured lines of credit. The bulk of the media commentary was centered on the reduction in amortization but I was more interested in the implications of the last measure on existing secured lines of credit. After all, many investors borrow against their personal residence to invest in the equity markets. Are they going to be paying higher rates on their current balances or future borrowing?

It appears that the answer will most likely be no. Investors are already paying a higher interest rate on existing home equity lines of credit compared to variable rate mortgages. While homeowners with excellent credit typically can obtain a secured line of credit at Prime plus 1 percent, they can obtain a variable rate mortgage at Prime minus 0.7 percent. In other words, homeowners already pay a significantly higher interest rate on borrowings from their secured lines of credit. And since very few financial institutions are reported to insure their HELOC portfolios (according to this report put out by TD Economics), it is likely that homeowners will not be paying a higher rate on their HELOCs.

It is clear that the first measure will put the brakes on ballooning mortgage debt. But it is curious to note that TD Economics forecasts little impact from the measure reducing the maximum refinancing amount saying that less than a fifth of refi loans are high loan-to-value and estimating that less than a tenth of refi loans will be impacted by the measure. If measures two and three are not going to make a significant dent on the growth in personal debt that the Government is purportedly concerned about, why tighten these two rules in the first place?

This article has 11 comments

  1. I’d say that measures that affect nearly 20% of new mortgages and nearly 10% of refinancings is actually quite significant. The mortgages that end up not being taken due to these new rules are exactly the ones that are most likely to have lead to defaults when interest rates rise.

  2. the difference in rate between lines of credit and more traditional mortgages with a variable rate is not due to what you do with the money – it is due to the fact that LOCs are completely open and can be paid off at any time without penalty – variable mortgages, particularly those that get a rate below prime, involve a five year term and there are penallties to repaying early

  3. @Rob: Good catch. Now, I’m starting to wonder. Perhaps, banks will boost the interest rate on lines of credit yet again? I saw in the Globe today that the banks could be expected to tighten up the borrowing standards on these accounts but I haven’t seen anything on the impact on rates.

    @Michael James: There must be a good reason for the two measures. TD Economics doesn’t expect much impact because they see consumers cutting back anyway. I’m curious as to what the Government’s reasoning is. The backgrounder doesn’t explain it fully.

  4. I was watching BNN last night and one of the hosts mentioned that a subtle change that has gone unnoticed was the change to the tax deductability of HELOCs for investment purposes. I haven’t been able to find anything discussing this though, and was wondering if any readers have had different luck.

    • @chris: I’d be really surprised if that was the case. There is no mention of tax deductibility in either the press release or the backgrounder or in any of the coverage I’ve seen.

  5. I have heard nothing about the tax deductibility of HELOC changing. This would involve a lot of changes of rules in the tax code. CRA could increase their efforts to verify that a clear paper trail exists that shows the money was exclusively used for investments, and that those investments generated income or dividends (property income), but to say that you can’t deduct investment funds borrowed through HELOC would be difficult to make happen.

  6. I would have preferred to see an increase of the minimum down payment.

  7. I heard a good comment on the radio that the new mortgage rules might reduce speculations in the real estate market. That’s probably good if the speculation is done using your HELOC which I know people that have done that … Otherwise, I am not sure how many people intend to take more than 30 years for a mortgage amortization … That’s just insane. My home equity with Scotia only allowed up to 75% of the equity, I am surprised by the 90% and even 85% options out there.

  8. I left home to get away from My Mother, and I really resent that the same clowns who turned our significant surplus into a major defecit have the gall to tell me what i can or can do in my personal financial affairs

    Harper surrounds himself with people dumber than He is, that way He doesn’t feel threatened.

    Want to reduce Canadian Debt, how about starting with those Gold Plated Pensions and benefits earned by Government Employees, How about doing something that will make a differance instead of grabbing headlines??

  9. Pingback: Random Thoughts: Mortgage Rules Change | Canadian Personal Finance Blog

  10. I am sure that those rules will have a negative impact on personal finances of some people. Moreover it will affect the performance of the estate market. It may bring some positive numbers for banks but it is just temporary matter. I understand that they want to rebalance security risk in their portfolio but the effects on the market can be higher than they expect. I am wondering what the headlines can bring after one year about this topic…