OSFI, Office of the Superintendent of Financial Institutions, which regulates the banking system in Canada is proposing to limit the home equity lines of credit (HELOCs) to 65% of home value from the current 80%. This is a significant change for the following reasons:
- Real estate investors access their home equity to finance investment properties (downpayment for buying an investment property, renovating an investment property until the property is refinanced and emergency funds if required)
- Self employed Canadians access their home equity to fund business capital requirements, cash flow requirements, as well as safety net if urgent matters arise
Canadians have taken on significant amounts of debt over the last few years (debt to income ratio is at all time highs around 1.5:1 ratio), however the mortgage delinquency rate in Canada is less than 1%. The new HELOC change will have a significant impact not only on self employed Canadians and real estate investors but also other Canadians who use their HELOCs to invest into the stock market to create a tax deductible loan and be tax efficient.
In my opinion, OSFI is overreacting by reducing HELOCs to 65%. 75% of home values would be a reasonable change. Afterall, Canada is known for moderate changes. Time will tell if this move is a good one for the economy and protects the housing market from a real estate bubble.
To discuss how these changes will impact your mortgage financing needs and options to address your capital requirements, please contact me.