Home Equity Lines of Credit (HELOCs)
A HELOC is a form of revolving credit that is secured by a residential property. Unlike a
traditional residential mortgage, most HELOCs are not constructed to fit a pre-determined
amortization, although regular, minimum periodic payments are generally required by most
lenders.
HELOC products provide an alternative source of funds for consumers. However, FRFIs should
recognize that, over time, these products can also significantly add to consumer debt loads.
While some borrowers may elect to repay their outstanding HELOC balances over a shorter
period of time relative to the average amortization of a typical traditional mortgage, the
revolving nature of HELOCs can also lead to greater persistence of outstanding balances, and
greater risk of loss to lenders. As well, it can be easier for borrowers to conceal potential
financial distress by drawing on their lines of credit to make timely mortgage payments and,
consequently, present a challenge for lenders to adequately assess credit risk exposure.
Given the unique features of HELOCS relative to traditional residential mortgages, FRFIs
should, in principle, treat all HELOCs in the same manner as they do non-conforming residential
mortgages. Lenders should exercise, at a minimum, the same level of underwriting due diligence
in issuing HELOCs over a non-conforming residential mortgage. Lenders should ensure
appropriate mitigation of the risks, including the ability to expect full repayment over time, and
the need for increased monitoring of the borrowers’ credit quality.
Sound industry practice is, therefore, to limit the HELOC component of a residential mortgage to
a maximum authorized LTV ratio of less than or equal to 65 percent. OSFI expects that the
average LTV ratio for all HELOCs to be less than the FRFI’s stated maximums, as articulated in
its RMUP, and reflect a reasonable distribution of LTV ratios across the portfolio. Section III
outlines public disclosure requirements for LTV ratios and HELOCs.
