Mortgage adjustments

There were more changes with respect to mortgage qualification this past week.

TD announced that they are changing how they calculate Home Equity Line of Credit (HELOC) payments for mortgage applications.

HELOCs are credit lines that are secured by a mortgage against your home.

When we submit a mortgage application, we are required to factor in payments based on the outstanding balance of any credit facilities.

For unsecured credit cards or lines of credit, we calculate three per cent of the current balance, regardless of what your lender requires as a minimum payment.

If you have a visa with a balance of $5,000 we use a payment of $150.

For HELOCs, we calculate a payment as if the outstanding balance is amortized over twenty-five years at the Bank of Canada Benchmark rate. Using the example of $200,000 HELOC with a balance of $50,000,  we would include a payment of $300.56.

TD has changed their guidelines so that we now add in a payment based on the approved limit as opposed to the outstanding balance.

For the same example, we would now use a payment of $1,202.22.

For new mortgages with a HELOC component, we calculate the payment based on the entire amount so it will be business as usual.

This change will affect clients who are looking to purchase or refinance second or subsequent properties (i.e. purchasing a rental).

As a very rough (and simple) calculation, every $500 of payments you have drops your borrowing power by about $100,000. For the example above, TD’s change means that the client will be able to borrow about $200,000 less.

I will qualify this by saying that each lender has different guidelines, policies, and procedures.

TD is the first bank in the broker channel to announce this change. I will not be surprised to see other institutions following suit.

Down the road, it will be interesting to see if a similar rule is applied to unsecured credit facilities. I work with a variety of clients, many of whom have multiple credit cards with zero balances.

If guidelines change such that we need to calculate in payments based on limits as opposed to balances, borrowing power will be greatly reduced for many people.

An irony is having multiple credit cards you use responsibly (maintain no or minimal balances) goes a long way to increasing your credit score – something lenders look for.

While there are people in over their heads financially (for whatever reason), there are just as many who use their credit facilities responsibly.

Changes to mortgage legislation over the last few years to slow the housing market and protect Canadians from becoming over-extended have impacted the ability of many buyers to get into the market.

I’m seeing people renting for longer despite having worked and saved to be able to buy.

If the rules continue to change and now affect those looking to purchase rental housing, it will be interesting to see what happens to the rental housing market over the next few years.

While I was at the Mortgage Professionals Canada conference two weeks ago, I listened to economist Benjamin Tal, who thinks recent changes will lead to an over-correction by 2020.

Lenders and clients will adjust and adapt, just as they have to changes in the past.


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About the Author

Tracy Head and Laurie Baird help busy families find mortgage solutions. Together they have more than 45 years of experience in the mortgage industry.

With today’s increasingly complicated mortgage rules, Tracy and Laurie spend time getting to know the people they work with and help them to better understand the mortgage process. They support their clients before, during, and after their mortgage is in place.

Tracy and Laurie work closely with their clients, offering advice and options. With access to more than 40 different lenders, Tracy and Laurie are able to assist with residential, commercial, and reverse mortgages in order to match the needs of their clients with the right mortgage package.

They work closely with their clients to find the right fit, and are around to provide support for years down the road!

Contact them at 250-862-1806 or visit http://www.okanaganmortgages.com

Visit their blog at https://www.okanaganmortgages.com/blog


The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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