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Readvanceable Mortgages: OSFI Changes Rules

The Office of the Superintendent of Financial Institutions (OSFI) has recently announced a small change to rules for readvanceable mortgages.

What are readvanceable mortgages?

Readvanceable mortgages, sometimes called Combined Loan Plans (CLP), are an amortizing mortgage blended which also has a revolving line of credit. Simply speaking, it is a tool which makes simple the process of borrowing money from the home equity. It is a combination of a traditional mortgage and a home equity line of credit (HELOC). As with passing time, you repay your mortgage, the home equity goes up, and you are automatically entitled to borrow more from the HELOC. It also means you the amount you can borrow keeps on increasing and have easy access for big purchases. You don't need to make any application fee or spend time in applying for this HELOC. For readvanceable mortgages too, you would be required to pay an interest on the amount you withdraw. In such mortgages you are entitled to borrow if and when in need. You don't have to go through the headache of applying for loans or going in for tools such as mortgage refinance as you already have ready access to the home equity.

How does the change by OFSI affect you?

Through this change, OSFI wanted to address the fact that 'financial institutions are well-prepared to address the risk of persistent, outstanding consumer debt to lenders'. In his statement, the OSFI Superintendent Peter Routledge said, "OSFI is continuously monitoring the economic environment for a range of vulnerabilities that could pose a risk to the health of Canada’s financial system. We have asked federally regulated financial institutions to make their innovative mortgage products safer and more sustainable over the long term.” As per OECD statistics, Canada has the ninth-highest rate of household debt as a percentage of net disposable income compared to other major Western countries, including Spain, the UK, and the U.S. In its statement, the OSFI said, “The most significant concern with these products is the readvanceability of credit above the 65% loan-to-value (LTV) limit.” It could thus lead to a longer continuance of balances that are outstand and would lead to more risks to lenders as well as households.

The changes implemented by the OSFI will affect the manner in which borrowers will be able to use readvanceable mortgages henceforth. Until now, after paying the principal amount, even if it is above the 65% loan-to-value (LTV) limit, they could reborrow the principal amount instantly. As per OSFI, from late 2023, the principal amount of 23% will be used towards paying down the overall debt and lowering the total readvanceable mortgage borrowing limit. So in effect, borrowers who require a readvanceable mortgage which readvances above 65% loan-to-value, can only seek it from non-federally regulated lenders like a credit union.

If you have any questions, doubts, or concerns about any mortgage-related issues, contact us at LendX Financial. We are happy to help!

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