The new restrictions that have been placed on getting a HELOC, other second mortgages, and home refinancing have left a lot of homeowners confused about what they need to qualify for these types of loans. How much exactly can you borrow? And what are the exact requirements that you’ll need?
With the new rules that were announced in June and that went into effect on July 9, a homeowner can now borrow up to 80 per cent of the equity in their home. This is less than the 85 per cent that could be drawn on before the new rules took effect, but it’s certainly not as low as the 65 per cent of home equity that the Office of the Superintendent of Financial Institutions wanted to implement. But in order to borrow that much against your home equity, you first need to have equity in the first place – and you’ll need at least 20 per cent of it. You can obtain 20 per cent of your home equity by either paying off 20 per cent of your mortgage (either through monthly payments of your down payment,) or by increasing the value of your home by 20 per cent.
If you go to a private lender or second or third-tier lender in Toronto, this equity might be the only requirement you’ll have to meet in order to get a HELOC. If however, you need or want to go through a major lender, you’ll probably need a little more than just equity.
Your debt-to-income ratio will also be considered by major lenders. This is the amount of debt you carry compared to the amount of income you bring in; and the amount of debt you have will be broken up into two different parts. The first will include your mortgage payment, your potential HELOC payment, the interest that will accumulate on the loan, property taxes, homeowner’s insurance, and mortgage insurance if you have it. All of this should equal no more than 28 per cent of your pre-tax income. Any other debt that you have including credit card payments, car loans, student loans, child support and other debt should not equal more than 36 per cent of your total income before taxes.
In addition to your debt-to-income ratio and equity, major lenders will most likely also require a fairly good credit score and a steady employment history. Typically lenders like to see that you have been employed within your industry for at least two years.
The new requirements for obtaining a HELOC in Toronto might be more stringent than what we’ve been used to. However, they’re not nearly as strict as the proposed rules were and if you have equity in your home and know where to go, it’s still very easy to get a HELOC in Toronto.
