From April 18, 2011 The Government of Canada Will No Longer Guarantee Home Equity Lines of Credit (HELOC)
In January 2011, Canada’s Department of Finance announced a series of changes to mortgage and property financing rules. These new mortgage rule changes are intended to cool Canada’s real estate market and slow Canadians per capita debt growth in the short term and support the long-term stability of the Canadian property market.
Jessi Johnson a Mortgage Broker in Vancouver was kind enough to come and explain the changes.
In part 1 of 3, we talked about how the Department of Finance rule changes are shortening the amortization for high ratio mortgages. In part 2 of 3, we discussed how under the new mortgage rules it will only be possible to pull out 80% loan to value when refinancing a property in Canada from March 18, 2011.
Today we are talking how the Government of Canada will no longer insure or guarantee Home Equity Lines of Credit offered by Canadian Banks and lending institutions from April 18, 2011.
Wikipedia defines a Home Equity Line of Credit as follows:
A home equity line of credit (often called HELOC and pronounced HEE-lock) is a loan in which the lender agrees to lend a maximum amount within an agreed period (called a term), where the collateral is the borrower’s equity in his/her house. Because a home often is a consumer’s most valuable asset, many homeowners use home equity credit lines only for major items, such as education, home improvements, or medical bills (US), and choose not to use them for day-to-day expenses.
HELOC abuse is often cited as one cause of the subprime mortgage crisis (In the US)
In Canada, the Federal Government will no longer guarantee Home Equity Lines of Credit from April 18, 2011.
Why are the Feds doing this?
Canada’s Federal Government does not want Canadians to use their homes as ATM’s as Jessi mentions by spending the money they can get from a HELOC when their property prices go up.
Why Does it Matter if Canada’s Federal Government Stops Backing HELOCS?
Canada Guarantees HELOCS?
Prior to April 18, 2011, the Federal Government gave a guarantee to banks and other lenders offering HELOCS, that the Federal Government will cover any losses that these lenders suffer when a borrower does not pay back a Home Equity Line of Credit (HELOC). This guarantee made these loans a risk free investment for the Banks and lenders offering HELOCS because the Feds would cover any losses.
Risk + Demand – Supply = Higher Costs
Risk costs money. When the banks and lenders who offered HELOCS had no risk of default on these loans, they had no reason to charge a risk premium in the form of higher interest rates. From April 18, 2011, if a borrower with a HELOC defaults the lender is on the hook for the loss rather than the Canadian Government.
The Bottom Line
To hedge against these anticipated losses, lenders will require a risk premium in the form of a higher interest rate on HELOCS. Some lenders may completely pull out of the HELOC market altogether. Less supply of these HELOC loans coupled with stable or increasing demand means higher prices. Increased risk for lenders also means higher prices.
If you’re looking to get a HELOC after April 18, 2011, expect it to be more expensive and harder to find and qualify for.
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