Those more rigid lending standards could see banks shore up their underwriting on HELOCs, making it more difficult to extend clients – especially at the top-end of debt-servicing ratios – those higher-interest loans.
The impact would be more acutely felt by investors using HELOCs attached to their own residential mortgages to as seed money and to fund renovations.
The draft rules are focused on ensuring banks collect more detailed information about a borrower’s ability to pay their debts on time. OSFI also wants banks to disclose more information about the default risks associated with their expanding mortgage portfolios.
Still, the HELOC question may have the widest impact on investors using those products as revolving credit.
The guidelines come at the same time the government amplifies its concerns about rising household debt levels. While mortgages have been a central area of concern, many mortgage brokers are asking the federal government to focus on unsecured credit and HELOC credit growth, calling that the real culprit.
OSFI may in fact agree.
“These products can also significantly add to consumer debt loads,” said the regulator, in sharing the draft guidelines Monday. “As well, it can be easier for borrowers to conceal potential financial distress by drawing on their lines of credit to make timely mortgage payments and, consequently, present a challenge for lenders to adequately assess credit risk exposure.”
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While the proposal from the Office of the Superintendent of Financial Institutions Canada (OSFI) would require bank boards of directors to directly approve mortgage underwriting polices, it would also force them to apply the same scrutiny to home equity lines of credit.