Rate and BOC – Should You Be Locking In?
Bank of Canada increased the overnight rate from 3.25% to 3.75%
As inflation remains at some of the highest levels, rates are potentially rising again by the end of the year. 50 bps is what October 26th brought and another possible rate hike in December. This will directly impact all HELOCs, unsecured Lines of Credit and variable-rate mortgages.
The big questions for many are should I lock in my mortgage and what happens at my renewal? The most important thing to remember is that the variable is 3 months of interest anytime to get out of and fixed comes with higher penalties if you break mid-term to renegotiate later. The other thing to remember is that if you paid 1.5% – 3.00% over the past couple of years and now the rate is 5.45% to 6.45%, you have paid an average of around 3.5% to 4.75%.
The idea behind a variable, was to pay the mortgage down while interest rates were at historical lows and then use the strategy to either go against inflation by increasing your payments, set your payments as if you were paying a fixed, invest or create cash flow. If you are looking to lock in, everyone has a different discount from prime and will be offered different rates to lock in. The lock-in rate will be a term that is equal to or greater than what you have left on your current term to avoid penalty.
So here are the steps to take if you are considering a lock-in rate. Call the lender and ask the following:
- What rate can you offer from 3- 5 year fixed?
- What is the current or remaining amortization?
- What would my new payments be with these new rates?
- What is the balance of the mortgage?
- Find out what the payment will look like if it goes up another 1% or more
Then you can email our team with these options, and we can see if there is something better for you available.
To speed things up for our team – make sure you know what your current rate is and put it in the email. Make sure you let us know who your lender/ bank is so we can get you some details
How To Fight Inflation
Here is a list of strategies and options we have put together for you to help you combat inflation:
- If you started a business, then make sure to pay off the no-tax deductible debt first like the mortgage
- Use savings to pre-pay the mortgage down for now and you can always pull back out later or set aside to pay the difference or pay off outside debt to outside debt
- Look at extending the amortization to 30 years if you have 20% equity
- Look at locking in and setting the rate to avoid fluctuations
- Consolidate debt into the mortgage such as credit cards, LOCS, and large expenses coming your way, pay off vehicles with high payments and put funds in your bank account – remember your equity is still your money
- Contact your car company and ask them to extend your car payments
- Add a HELOC to your house
- Potentially get a co-signor if you do not qualify to increase the mortgage such as a parent or sibling
- Turn your mortgage into a tax-deductible mortgage
- Add money to the mortgage to create an emergency fund
- Do not do accelerated payments for now. Go back to regular payments to increase monthly cash flows
- Lock into shorter terms
- Co live by house hacking and rent out space
- Co-mortgage with someone by inviting a joint partner to your home
The 5-year fixed today is between 4.89% and 5.89%. The rates will vary depending on what your current mortgage was priced at and the fixed lock-in rates with your lender.
So let us know if you have any questions or need any assistance.
Using Readvanceable Mortgages To Your Advantage
Why You Should Consider Getting One
These days it seems as though the housing market has been cooling down, so it doesn't come as a surprise that many Canadians are moving forward with their house-buying plans.
With so many mortgage options, it can be difficult to choose one that's best for you. Be that as it may, readvanceable mortgages are definitely an option to explore, especially in today's economic climate.
They are a lesser-known option but worth considering if you're looking to buy a home or even refinance your mortgage.
Readvanceable Mortgages Explained
For starters, a readvanceable mortgage is comprised of a line of credit which allows for borrowing and a mortgage. Essentially, this type of mortgage combines a home equity line of credit, also known as HELOC, with a traditional mortgage.
Personal finance writer Julia Kagan explains that readvanceable mortgages allow the borrower to "add a line of credit to the loan, permitting the borrower to re-borrow any part of the principal paid down."
Read More: How To Deal With Mortgage Payment Difficulties
So as you make payments towards your mortgage, the amount of credit available to you increases. Although readvanceable mortgages encompass a home equity line of credit, there are still some key differences that make this type of mortgage unique.
How Is A Readvancable Mortgage Different Than A HELOC?
Both HELOCs and readvanceable mortgages have similar features but there are a couple of things setting them apart.
A HELOC is a type of credit that enables access to large reserves to be used for debt repayments or for purchases with a higher price tag. Many opt for HELOCs due to the competitive variable rates at which they are offered. With this line of credit, your home's equity is taken as collateral, explaining the access to a large pot of funds.
Read More: New Rules For Reverse Mortgages and HELOCS by OSFI
A readvanceable mortgage works differently by the borrower accruing access to more funds with each principal payment made on the mortgage.
This is the one of the main differences instead of having access to reserves immediately like a HELOC. Similar although different, HELOCs and readvanceable mortgages are both options to consider given rising interest rates. However, readvanceable mortgages might be a more suitable option if interest rates continue to climb.
Using A Readvancable Mortgage For The Smith Manoeuvre
Borrowers can make their readvanceable mortgage interest payments tax-deductible using the Smith Manoeuvre.
Back in 2002, financial planner Fraser Smith created a debt conversion strategy known as the Smith Manoeuvre. By having a readvanceable mortgage and using the Smith Manoeuvre, borrowers will potentially be able to profit and reap the benefits of tax-deductibles.
Read More: Save Money On Your Taxes Using The Smith Manoeuvre
The Smith Manoeuvre involves taking the line of credit within a mortgage and turning it into an investment loan. By using a readvanceable mortgage with the Smith Manoeuvre you could increase your tax return. Then you can be apply it onto your mortgage, effectively reducing your debt.
Julia Kagan says that the "borrower entering a readvanceable mortgage will usually need to be an engaged and attentive investor in order to make smart investments with the reborrowed funds and mitigate the impact of the higher interest rates on the line of credit."
The Smith Manoeuvre strategy isn't something that everyone knows about. But it's definitely a strategy that can save you money and even make some. However, it is always important to consult your financial advisor when deciding to take on a new investment practice.
October Rate Hike To Impact Housing Market?
BOC: Condoning More Interest Rate Hikes
Canadians, especially homeowners, have been grappling with the increased interest rates since the Bank of Canada announced the hike just last month. Raising by 75 basis points, the rate sits at 3.25% and has buyers holding off on purchasing homes, despite the re-calibrating housing market.
Read More: NBC's Interest Rate Hike To Bring Mortgage Market Stabilization
Many have wondered if this was Canada's last rate hike. Chief economists from CIBC, Benjamin Tal and Karyne Charbonneau, said CIBC doesn't predict more rate hikes in the next year. However, according to the governor of the Bank of Canada, that might not be the case.
Calls for More Rate Hike--Up to 4 %
Recently, the leadership from the Bank of Canada made a statement on the Bank's stance on interest rates in the wake of inflation:
"In September, we raised our policy interest rate for the fifth consecutive time since March. And we indicated that interest rates will likely need to go higher still to bring inflation down to the 2% target."- said Tiff Macklem, Governor at the Bank of Canada.
Read More: The Inflation Tsunami in Canada
The BOC is expected to review the incoming financial policy decision in the coming weeks. The next overnight rate target is set for October 26th, only then will Canadians have an answer.
Steven Huebl, Canadian Mortgage Trend reporter, says "with the benchmark lending rate currently at 3.25%, there are growing expectations that the Bank of Canada’s terminal rate for this tightening cycle will be 4%, if not higher."
Huebl wasn't the only one to voice predictions of the cycle hitting 4%. The Organization for Economic Co-operation and Development (OECD) recently released the September 2022 Economic Outlook Interim Report. The fall report also predicts that the BOC's benchmark rate will amount to 4.5% in the coming year.
Canada's Correcting Housing Market will Continue Cooling
Now that another interest rate hike is on the table for Canada, homeowners are wondering how this will impact the housing market.
Mortgage professionals, like RBC's Robert Hogue, have been saying that the housing market is more so re-calibrating as opposed to crashing.
As predicted, before the September rate hike announcement, further rate hikes coming before 2023 will lead to mortgage rate increases. Aside from mortgage rate increases, a second rate hike will impact the purchasing habits of buyers. Not to mention sellers might be on the sidelines.
Read More: Rate Hikes Lead To House Price Fall?
Canada Mortgage and Housing Corporation (CMHC) is now calling for a much cooler forecast in the Canadian housing market based on the foreseeable increase in rates and inflation. Economics reporter Craig Lord says that CMHC's most recent report reflects that "national average home price in Canada will fall 14.3 per cent by the second quarter of 2023."
In an interview with Canadian Mortgage Professional, Senior CIBC economist Benjamin Tal said "the market is already slowing. Now you get an extra push, so [it] will continue to slow. I think that will be the story for the fall."
For the time being, no further information has been released about the potential rate hike. Homeowners, buyers, and sellers will need to wait until the next financial policy decision for an answer. The Bank of Canada will make an announcement on October 26th, 2022.
Mapping Out Housing Price Drops across Canada
Some markets cooling off amid NBC's recent interest hike
The idea of buying and owning a house has become increasingly difficult for many Canadians over the past two years.
Remember the beginning of the pandemic, when housing prices dropped drastically and the rate of home ownership shot up to record highs? It won't return to the same level however, with the recent interest hike, Canadians can expect to see housing prices dropping across Canada in the coming months.
Read More: Rate Hikes To Lead To House Price Fall?
Though it would be nice, not all cities will see the same price drops due to the different economic states in the provinces. Director and senior economist at BMO, Robert Kavcic reports that although housing prices are recalibrating across Canada, the speed and volume won't be the same everywhere.
The Average Price
Last week, the Canadian Real Estate Association (CREA) released a revised report, highlighting the national statistics of housing prices. Based on recent figures, last month, the national average home price was $637,673, revealing a 3.9% decrement from August 2021.
Though this might be the national average, it's important to consider the heavy influences of two markets in particular. The Greater Toronto Area (GTA) and Greater Vancouver have some of the steepest sales and prices in the housing market, so their numbers have a significant impact on the average.
Considering the situation in Toronto, the average home price dropped 12.4% to $760,400 in August after prices peaked in March. However, based on predictions some Canadian cities will see a steeper drop than others.
Read More: NBC's Interest Rate Hike Speculated To Bring Mortgage Market Stabilization
In March 2022, a report was released by the Canadian Mortgage and Housing Corporation outline the impacts of incoming interest rate hikes on the housing markets.
In light of the incoming price drops, the report notes that the steepest declines will align with the cities that saw the steepest price increases in 2021.
Taking this into account, the GTA and Greater Vancouver is likely to see steeper declines while cities like Ottawa and Montreal are recalibrating in a moderate fashion.
Suburb vs. Downtown
Although markets are expected to drop across Canada, a recent Bloomberg report points to new data showing that plummeting prices may not be equally distributed throughout cities. When the pandemic hit, we were all confined to our homes, leading to everyone wanting more space.
The best place to find space and big backyards are, of course, the suburbs, hence the increase in purchasing suburban homes during the pandemic. With the shift to remote work, that made sense for many Canadians.
Read More: Home Prices Could Fall More Than 12% By Next Year
But now that businesses and services in cities have reopened and workplaces are shifting to hybrid work, the interest has dropped in suburban homes. As stated in the Bloomberg report, a hybrid work model and the reopening of downtown businesses and offices may impact the housing market once more.
Market Forecast for 2023
As the Canadian housing market continues to go through changes and we see prices drop, this has left many wondering what's to come next year. Just over a month ago, Dejardins released an updated report predicting that the decline in housing prices will continue into next year.
At the end of 2023, it is still projected that Canadian property prices will be greater than they were before the pandemic.
Save Money on your Taxes using The Smith Manoeuvre
Get the most out of your mortgage
In Canada, homeowners and residents aren't able to deduct the interest paid on their mortgages from their taxes. Most Canadians wish that instead, they could reap the benefits of a tax-deductible mortgage interest that American homeowners have. However, luckily for Canadian homeowners, there is a loophole that can help, the Smith Manoeuvre.
What is the Smith Manoeuvre and how can you use it?
For starters, the Smith Manoeuvre was developed in 2002 by financial planner Fraser Smith in his book. Broadly, the Smith Manoeuvre is what some call a conversion strategy. Since mortgage interest isn't tax-deductible for Canadian homeowners, this method provides a way to convert mortgage interest into tax-deductible investment loan interest. What this means is any interest paid on a loan used to purchase investments (such as stocks, mutual funds, etc.) is tax-deductible.
The premise of the Smith Manoeuvre is to take the equity out of your home and use it to invest. Many Canadians already take equity out of their homes, for example refinancing. So what makes the Smith Manoeuvre different from refinancing and why is it better?
Well for starters, with refinancing there are many fees that come along with it. Since you're breaking a mortgage agreement, that gets followed up with financial penalties and appraisal fees. That's why the Smith Manoeuvre presents itself as a better option for Canadians since those fees aren't attached. Basically, the Smith Manoeuvre is a home equity line of credit, also known as a HELOC.
Read More: New Rules For Reverse Mortgages And HELOCs By OSFI
To carry out this strategy, Canadian residents will need to get a mortgage that is re-advanceable. This is comparable to a mortgage line of credit, however, with the re-advanceable mortgage, there are two important elements. A mortgage and a line of credit allow you to both pay down and borrow from. As a result, the amount you can borrow from your home equity line of credit grows with each payment you make on a re-advanceable mortgage (HELOC).
Risk vs Reward
When used properly, the Smith Manoeuver can have great benefits and result in a tax refund. But since this method is using a leveraged investment as a way to claim interest through tax deductions, it's important to consider the risk associated with it.
Before starting this process, it is important to sit down with your financial advisor to discuss the pros and cons of the Smith Manoeuvre considering your financial status. For example, if you are someone who likes to play it safe, then this may not be the financing avenue for you.
Read More: Hybrid Mortgages In Canada
With the Smith Manoeuvre and depending on how you approach the method, you probably wouldn't like to see a large fluctuation of value in your portfolio. However, if you're someone who likes taking risks and you have a keen eye for good investments, then Smith Manoeuvre might be a good option for you. Another important point to remember is this method is strictly a conversion strategy. In other words, it doesn't let you reduce your debt.
The Smith Manoeuvre's main goal is to pay off your regular mortgage and then move the debt to a line of credit that can be deducted from your taxes. At the end of the day, it's about evaluating whether this method is for you because like most financial strategies there are both pros and cons.
NBC's Interest Rate Hike Speculated To Bring Mortgage Market Stabilization
Over the past year, Canadians have watched the continued climb of interest rates. This September, the National Bank of Canada is expected to raise the rates once again, however, economists predict that this could be the final hike for a while. This is the fifth rate increase this year as the Bank of Canada continues to grapple with rising inflation. Economists Benjamin Tal and Karyne Charbonneau predict the hike to hit the 75bps mark, amounting to the key target rate of approximately 3.25% as detailed in a recent report.
In a TD report, economist Rishi Sondhi explains that 5-year bond yields are predicted to decrease from 2022 to 2023 as consumption slows due to elevated interest rates. This applies pressure not only on household debt but mortgage debt, which Tal and Charbonneau explain a large quantity was accrued in an environment where the low-interest rate was conducive.
Read More: Canada's Interest Rates Still Not The Highest They've Ever Been
Mortgage Debt & Household Sensitivity
Though current interest rates are considered lower by comparison to historical rates, the pressure of inflation alongside the burden of increased rates will indicate a slow in consumption. Benjamin Tal and Karyne Charbonneau say that "...households’ fundamentals are now generally stronger than seen at the eve of previous hiking cycles." They also state that the "...structure of household debt will shield many borrowers from the full sting of higher rates in the coming year." In Q3, the Bank of Canada reported successful results for portfolios containing home equity lines of credit and mortgages.
Despite progress in the latter, with rising interest rates looming, a slowdown is predicted to follow. Considering this, it is noteworthy that 11% of NBC's mortgage borrowers are investors, and 31% of its mortgages have variable interest rates. Taking into account the percentage of mortgages that utilize variable interest rates alongside inflation, this suggests that households will have a higher sensitivity toward raising rates.
At this time, economists don't predict further rate hikes in 2023, however, there is also no indication that interest rates may be lowered in 2024. In essence, Canadian households will have to burden with the increase in rates and inflation however, the capacity to maintain consumption growth at the current rate should preclude the Bank of Canada from loosening monetary policy in 2023.
Read More: Home Prices Could Fall More Than 12% by Next Year
Housing Market Stabilization
As monetary policy tightens to bring current excessive inflation rates back to targeted levels, mortgage rates are anticipated to increase. In Canada Mortgage and Housing Corporation's Spring 2022 report, it is said that higher rates will have a limited effect on home demand and price growth in 2022. The report also states that "...this will be especially true in centers like Vancouver, Toronto, and Montreal where tight resale market conditions will overwhelm higher mortgage rates initially."
Mortgage volume at the National Bank of Canada increased 8% on a yearly basis, leading economists to predict that the demand for real estate secured financing will continue to stabilize, returning to pre-COVID levels given the rising interest rate environment. At the same time, housing prices are expected to shift, re-stabilizing as an effort to backtrack the soaring 46% accumulation that occurred throughout the pandemic. Most notably, previously where housing prices sky-rocked, namely Ontario and British Colombia, where the steepest declines in price can be found.
Read More: Rate Hikes to Lead to House Price Fall?
Although many Canadians would find lower interest rates more agreeable, in terms of decreasing inflation, consistency is key. Economists believe that to avoid failure in lowering inflation, the maintenance and rigidity of a restrictive monetary policy is needed to balance and ultimately reduce the high level of inflation. Altogether, rarely does the Bank of Canada depart from the monetary policy of the Federal Reserve, which supports predictions of higher rates for a longer period.
Home Prices Could Fall More Than 12% By Next Year
Canada's Housing Market In The Middle of Corrections
High-interest rates could have influenced the correction of the housing market that is currently ongoing in Canada. According to one of the country's largest banks, home prices could decline more than 12 percent, Bloomberg reports. Robert Hogue, RBC's economist, also predicts that the number of total home sales in the country will decline by 42% by next year.
Read More: Canada's Interest Rates Still Not The Highest They've Ever Been
Ontario and British Columbia will be the main focus of these corrections, which some say are "historic". Sure, the fall in sales will be a bit bigger than what it was in the 1990s, however, the reality is - 2023 will beat that record by only 1%. In Ontario at that time, home sales fell by 41% and housing prices fell by 15%. British Colombia, on the other hand, dealt with prices falling by 27% and sales falling by 62% in the 1980s.
Read More: Ontario Housing Getting Too Expensive
Even though the prices and sales will drop a bit, that doesn't necessarily mean the housing market will collapse, says RBC. Instead, this situation should be looked at from a positive point of view: the cooling of the market will be a bit faster this way.
That of course will lead to new homeowners in the future and the removal of the stigma of home ownership and equity being a luxury - a popular opinion for some millennials.
During COVID, the splurge in home ownership skyrocketed - with historically low-interest rates and sales going up by 47% in December 2020, 48% of millennials got their hands on their own houses. But, most of them relied on their family helping out financially.
Adult Children Were Given $10B To Buy Homes
However, the basic rule of supply and demand led to the rise in prices, which are abnormally high right now. That then led to making the rest of the renting population extremely hesitant to buy their own home, especially with the current interest rates.
The ongoing corrections should cool off all of that and take the weight off the homeowners' shoulders in the future when the drops in prices and sales cause interest rates to stop rising and go back to what we're used to, hopefully.
Read More: Three Tips For Homeowners Struggling With Paying Off The Mortgage
The housing market correction and the post-pandemic recovery might also influence the 'return to normal' of housing prices in specific areas as well. According to a recent research by the Bank of Canada, COVID-19 greatly influenced the rise of house prices in the suburbs, causing centrally located homes' prices to drop - which is not how things usually work.
Typically, home prices downtown are higher than in the suburbs, because of various factors: the land is scarce downtown, shorter commutes to work, more restaurants and bars, easy access to public services or transport, etc.
During COVID, we didn't need any of that and would rather spend time in our backyard or somewhere not hectic. Many lockdowns and closures of restaurants and bars kept us hanging out within our four walls, so it was better to be somewhere further away from downtown, more calm and private.
That led to a higher demand for suburban housing and therefore higher house prices in the suburbs. The whole thing resulted in a 10% price gap between centrally located houses and houses 50km away from the city core. In 2019, the price difference was about 26%.
A lot of questions remain unanswered when it comes to housing in Canada and it will be interesting to see how things unfurl. The Wilson Team will, as always, maintain focus on the market and update the site as we learn more.
The Benefits of A Good Credit Score
How to maintain the high numbers
Even though the conversation about a good credit score is pretty common and happens almost daily for some, paying attention to maintaining a good one has not been a priority for others. Mistake number one. Surviving with bad credit is doable, but expensive and makes life harder than it should be.
Taking care of your credit score is crucial if you want to avoid missing out on big opportunities. Not only that, but you will also end you paying more than you should - after all, having a good credit score means lower interest rates, among other things! Here are the biggest benefits of having a good credit score.
Six Benefits Of Having A Good Credit Score
1. Lower Interest Rates
When applying for a loan, whether it's a mortgage or a credit card, a lender will check your credit score. Based on the number, they will determine your interest rates. With a good credit score, you almost always qualify for low-interest rates. The lower the interest rate, the sooner you'll pay off your debt, and the more assets you'll have for spending on other things.
2. Higher Mortgage Amounts And Limits
After proving to the banks that you can handle your money and demonstrating to them how responsible you are, they will let you take on more responsibility. Since you've proven that you pay back what you owe on time, they will let you borrow more money, giving you greater buying power which is very important in today's real estate market for example.
3. Easier Approval On Rentals and Jobs
More and more landlords want to check your credit score as a part of their tenant screening process. A bad credit score can definitely affect your chances of getting the apartment you want. Even some jobs need security clearance and proof you know how to handle your finances. They need to make sure you won't take bribes, for example, or steal from the company because of your financial issues.
4. Lower Insurance Rates
You need insurance for so many things: tenant's insurance, home insurance, car insurance, life insurance, etc. Having a good credit score will lower your premium and avoid paying more. Insurance companies use your credit score to design the insurance risk score. If you have a low credit score, you could end up paying 100% more than what you would pay with a good credit score.
5. Negotiating Power
With a good credit score comes leverage to negotiate for anything you're borrowing for.
You can negotiate your way to a lower interest rate on a new loan or a credit card. With a low credit score, banks and lenders will not let you win this one and the fees on loan terms will remain as high as possible.
6. Build Assets
All the way to wealth. The possibilities are endless - you can get RRSPS loans, rental properties, leverage your mortgage to invest, become an accredited investor, buy abroad, etc. With low credit, you lose out on major opportunities!
How To Have a Good Credit Score?
By avoiding these common mistakes:
- Don't get added to someone's credit card - have your own.
- Don't close all your accounts, even if you don't use them. The creditors like seeing two accounts. Use them
- Have two types of loans - a static loan and a revolving loan. For example, a car loan (static) and credit card (revolving).
- Don't exceed 65% of your limit.
- Pay your bills on time. Set up automatic payments to help you with this.
Canada's Interest Rates Still Not The Highest They've Ever Been
There Is Room For Improvement
If you thought today's mortgage rates were high, guess again. With Canada's interest rates rising, it's easy to go into full panic mode. The current prime rate - the rate banks and lenders use to determine interest rates for loans and lines of credit - is at 3.70% and will continue to rise. But, this isn't even close to what the rates were like in the 70s or even 20 years ago.
Even though rates today are higher than they have been in recent years, they are still low when you compare them in a long-term context. Keep in mind that Interest rates are a reflection of the country's economy and current global situation. So, with every major change in global politics, or certain events - the value of money will change, even for a bit.
That's the situation we're currently in - the pandemic and certain political events have caused major inflation on a global level and changes in mortgage rates are bound to happen.
But that doesn't mean the negative effects of these events are here long-term. The economy has already been through a similar state, with average interest rates for a five-year mortgage being as high as 21.46 percent in 1981! Let's compare.
The History Of Interest rates In Canada
For example, the most popular rate in Canada is the five-year fixed mortgage rate. According to Statistics Canada, this is the mortgage type that accounted for about half of the existing conventional mortgages.
Currently, if you were to opt for a conventional five-year mortgage rate, your interest rate would come to about 6.04 percent. If you did the same forty years ago, in July 1982 - that rate would have been 19.22 percent! Why is that?
The recession, mainly. In 1981, the Bank of Canada raised its benchmark lending rate to a whopping 21% for various reasons: the mentioned recession, the Iranian Revolution which affected oil production, etc.
After that, the average five-year fixed rates have generally moved downwards, but we're far from the worst. Now, the average rates are about as high as they were during the Great recession in 2007. And we all remember how bad that was.
However, even after that recession, we managed to lower the interest rates to about 3.5% just a year ago. That means that, depending on future events, the interest fees could go back to "normal" as we know it and settle down.
Sure, now is a scary time for some people that just dipped their toes in the home-buying waters. Higher rates might happen. However, the best thing for you to do now is to extend your amortization period, according to Kelly Wilson.
As she stated for the Canadian Press - yes, you will pay interest for a longer period, but it could make room for some debt paying or retirement savings, because "It's still cheaper borrowing than anywhere other place you can borrow."
New Rules For Reverse Mortgages and HELOCs By OSFI
HELOCs or reverse mortgages exceeding 65% of a house's value will be targeted
A new set of guidelines is being implemented by the Office of the Superintendent of Financial Institutions (OSFI), reports CBC News. The new set of rules will apply to shared equity mortgages, reverse mortgages and conventional mortgages paired with revolving credit lines. In this time of a vulnerable housing market, the changes should help lenders and borrowers stay on top of their obligations.
One of the biggest changes will affect the conventional mortgage loans paired with revolving lines of credit, known as HELOCs. Currently, homeowners can dip into them as they see fit, without having to repay on any sort of schedule.
The new regulations will take effect once a loan exceeds 65% of the home's value. Currently, homeowners can borrow up to 80% on such a loan. So, with the new changes, the borrower will be forced to start paying back some of the principal if they go over this limit of 65%.
How will that work?
Well, if the limit is exceeded, the loan "will operate more like a traditional mortgage where the borrower makes principal and interest payments until the [loan gets back below] 65 percent," an official told CBC News.
The new rules will be in effect as of late 2023. However, the consumers are not supposed to see an increase in their monthly payments.
Changes To Shared Equity And Reverse Mortgages
Shared equity mortgages are programs where a third party provides the buyer with cash for a down payment in exchange for an equity stake.
In 2019, the federal government introduced a program for government-backed shared equity loans, and non-profits and community groups have since offered similar programs.
The latest OSFI announcement doesn't entail any new rules, but rather clarifies existing requirements. For example, such products must be equity stakes and not loans. They must be "on an equal footing with the borrower's equity," the official said.
The final changes cover reverse mortgages. Reverse mortgages let homeowners take advantage of the equity in their homes without selling them. These loans have grown in popularity in recent years, mostly because they don't require repayment until the owner decides to sell the property.
As with HELOC, new guidelines limit the amount a homeowner can borrow on a reverse mortgage to 65 percent at origination.