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.