TD, Canada’s top lender through home equity lines of credit (HELOC), is now systematically applying a more stringent approach for mortgage applicants who already have a line of credit backed by their home.

The bank is now vetting these borrowers based on their HELOC’s credit limit rather than their outstanding balances.

“A system change took effect on Nov. 5 reflecting our underwriting practice of taking into consideration the consumer’s entire debt obligation,” the bank told Global News via email.

This means even borrowers with a HELOC balance of zero might not be able to obtain a new mortgage, Rob McLister, a Toronto-based mortgage broker and founder of rate-comparison site RateSpy.com. Unlike loans and much like credit cards, lines of credit allow borrowers to take on only the debt they need — when they need it — up to a certain ceiling.

Lenders usually make sure mortgage applicants with an existing HELOC will be able to afford the new loan in addition to paying any money they already owe through their line of credit, McLister noted in a blog post. Shifting the focus on the maximum amount borrowers could take out through their HELOC will likely force some to lower the credit limit, close their line of credit entirely, or seek a loan from another lender, among other options, according to McLister.

“Debt service ratios are an important measure of a consumer’s ability to manage their financial obligations and reflect industry concerns around debt manageability — particularly in a fluctuating rate environment,” TD told Global News. “We consider a consumer’s entire debt obligation, which include the available lines of credit they currently hold (whether at TD or another institution) in addition to any credit they apply for.“

Lines of credit have variable rates, which means borrowing costs have been rising as the Bank of Canada continues to hike its trendsetting policy interest rate.

The big banks have also been facing tighter federal rules on both mortgages and HELOCs. Federally regulated lenders must stress test the finances of anyone applying for a new home equity line of credit to make sure they’d be able to keep up with debt repayments even at higher interest rates.

Banks must ensure that the borrower would be able to repay the maximum amount they can borrow through a HELOC within 25 years based on either a benchmark rate that currently stands at 5.34 per cent or a rate that is two percentage points higher than the actual rate the lender is willing to offer.

That rule, however, applies to new HELOCs. For lines of credit that predate the new federal guidelines, banks can choose whether to stress test borrowers based on their HELOC balance or their credit limit.

Right now, some of the big banks appear to be using HELOC credit limits while others are relying on balances.

RBC, for example, told Global News that, “we are unable to see if a HELOC from another financial institution is secured or unsecured, so we assess the client on the assumption that they could draw on the available credit at any time rather than assuming the balance at the time of application will remain unchanged.” 

The bank said it has had this policy in place since 2013 but did not specify whether it also applies to its own existing home equity lines of credit.

Scotiabank said it hasn’t adopted an approach based on vetting an existing HELOC’s credit limit. But “we continue to monitor the market to make changes to our lending policies as necessary,” it added.

CIBC, BMO and National Bank did not return requests for information about their own practices.

TD’s move to a tougher vetting process for existing HELOCs, though, is significant.

A report by the Financial Consumer Agency of Canada (FCAC) shows that, as of 2016, Canadians were holding roughly three million HELOCs with an aggregate balance of $211 billion. According to quarterly financial statements from the big six banks, TD has by far the largest HELOC balance.

For nearly two decades, Canadians have been relying on home equity lines of credit for anything from financing renovation projects to bankrolling day-to-day expenses. And HELOCs have played a significant role in driving household debt to unprecedented heights.

As interest rates rise and Ottawa tightens the screws on the mortgage market, though, the HELOC boom may be coming to a close.

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