Here’s how the new cap on home equity lines of credit will affect your ability to buy a cottage

Homeowners’ borrowing power will see a decline this fall as Canadian regulators attempt to tighten up risky loans. The Office of the Superintendent of Financial Institutions (OSFI), a government agency that regulates Canada’s banks, is targeting combined loan plans, which allow homeowners to increase the credit limit on a home equity line of credit (HELOC) as they pay down their mortgage.

Would extending mortgage amortization periods make cottages more affordable?

Previously, homeowners could borrow up to 80 per cent of the value of their house, but OSFI has decided to reduce that credit limit to 65 per cent.

“Some people start with a line of credit,” says Ottawa-based mortgage broker Andrew Thake. “So, if you bought a house and you put down 20 per cent, and you wanted a line of credit on the side, the line of credit would be a zero-balance available, zero-balance owing because it can’t go over 80 per cent. But as you pay down your mortgage by five grand, now, all of a sudden, you have a five grand mortgage line of credit available. And as you keep paying your mortgage down, eventually your mortgage would be at zero, and you’d have this massive line of credit available, because the line of credit limit grows as you pay your mortgage down. Eventually, your mortgage would be at zero and your line of credit would be at 80 per cent of the value of the house.”

The reason for lowering the HELOC limit is to protect banks against the risk of persistent, outstanding consumer debt, which can leave them vulnerable during negative economic periods, OSFI said in a statement. As of March 2022, there was $204 billion worth of HELOCs above the 65 per cent mark.

When the cap will come into effect

Banks will introduce the new limit on October 31 or December 31, depending on their fiscal year. The decrease from 80 per cent to 65 per cent will be gradual, with banks having 25 years to transition current HELOC borrowers.

“If you have a mortgage and you pay $1,000, your available borrowing limit on your line of credit grows by $1000,” Thake says. “But when banks implement the new limit, for that $1,000 payment on your mortgage, your line of credit will only grow by $875.”

Impact on mortgages and housing prices

This change won’t affect mortgage payments or the price of housing, only the amount of money you can borrow. In addition, Thake says it isn’t likely to impact your ability to buy a cottage. “Lines of credit are better to be looked at as short-term borrowing solutions,” he says. This is because a line of credit usually includes a prime plus a half interest rate. Right now, you be paying around a 7.5 per cent interest rate on a HELOC. Instead, Thake recommends taking out a second mortgage if you want to buy a cottage. A mortgage’s interest rate tends to be cheaper, sitting around 5.5 per cent right now, depending on the lender.

Some people, however, like having a line of credit available in case of emergency, such as time-sensitive repairs to your home, losing your job, or medical expenses not covered by insurance. But even then Thake suggests taking out a personal line of credit, which can stretch to $75,000 and doesn’t have a 65 per cent cap.

Thake doesn’t think the new cap will crush the industry and prevent people from being able to buy cottages anymore or renovate. “There are lots of other options out there to get financing.”