The Office of the Superintendent of Financial Institutions (OFSI) has implemented changes affecting those with combined loan plans (CLP). A CLP combines a mortgage with a home equity line of credit (HELOC) as a single financial product.

Most CLPs are readvanceable, which means the lender allows you to re-borrow the principal you’ve paid down with each mortgage payment. For example, if a mortgage payment reduces your balance by $1,000, your HELOC limit increases by the same amount, allowing you to re-borrow those funds against the HELOC whenever you want.

But this is about to change on November 1st, 2023.

 

The Current Rules

The HELOC portion of the mortgage can’t exceed 65% of your home’s value. This is commonly referred to as Loan to value (LTV).

When combined with an amortized mortgage, you can borrow up to a maximum of 80% LTV.

As the mortgage principal is paid down, you can reborrow back up to 80% LTV at any time. For example, if you paid the mortgage down by $1,000, you can then reborrow that $1,000 against the HELOC.

Under the new rules, you can still reborrow, but at a reduced amount. 

 

The New Rules

While you will still be able to re-access your equity after the principal has been paid down, it won’t be back up to the full 80% as it was previously.  Here’s how the OFSI explained it:

“Principal payments applied to the portion above 65% should be matched by a reduction in the overall authorized limit until this overall combined loan plan (CLP) authorized limit reduces to 65% LTV for all segments…combined”.

As this can be confusing to some, I’ll explain further.

The ‘authorized limit’ is commonly referred to as the ‘global limit’. This is the total of the mortgage and HELOC limit combined. If the property is valued at $1 million with a $650,000 mortgage and a $150,000 HELOC, then your global limit is $800,000 ($650,000 + $150,000 = $800,000).

When you add the mortgage and HELOC segments together, you get a total of 80% of the home’s value, or 80% LTV.

The OFSI’s goal is to gradually reduce the global limit with each and every payment with the goal of reducing the total of both segments to a maximum of 65% over 25 years.

 

How Lenders are Implementing the Changes

The amount of principal payments that can be readvanced can vary depending on a number of factors such as credit limit, amount borrowed, and loan to value.

The exact changes can vary depending on each individual lender, but I’ll give an example to better illustrate how this will work.

Let’s say the principal portion of your mortgage payment is $1,000. Previously, that full $1,000 would then increase your HELOC limit by $1,000.

Under the new rules, you’ll still be paying down $1,000 in principal, but the HELOC limit may only increase by $800, therefore reducing your global limit by $200 in this case. 

This would continue with each payment until the global limit (mortgage and HELOC combined) is reduced to 65% LTV.

For example, let’s say you have the following set up:

 

Home value: $1,000,000

Mortgage: $650,000

HELOC: $150,000

Global limit: $800,000

Total LTV: 80%

 

Under the current rules, the global limit would remain intact for the life of your mortgage, keeping the LTV at 80%. The LTV is calculated based on the value of the home at the time you arranged your mortgage.

Under the new rules, the global limit will gradually need to be reduced to 65% over 25 years. A lender may then calculate this by taking the amount over 65% ($150,000 in this case) and dividing it by 300 months (25 years) which works out to $500. This would be the monthly reduction in your global limit each month.

This is just an example to illustrate how it works. The exact portion of global limit reduction can vary from one institution to the next. If you’re currently in a CLP mortgage, it’s best for you to reach out to your current lender to find out how this will impact you.

 

Conclusion

These changes are not going to affect the vast majority of borrowers. You’ll still be able to borrow up to 80% LTV should you choose to refinance your mortgage. Your HELOC limit will still increase with each payment you make. It’s just that it will be gradually reduced over time.

The new changes will take effect on September 1st, 2023 for the big banks, and on January 1st, 2024 for all other federally regulated mortgage lenders.