What new mortgage rules mean for lines of credit?
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?