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Things just got a little more complicated for Canadians holding a home equity line of credit (HELOC).

Last week, TD Bank—Canada's top HELOC lender—quietly made changes to their mortgage application review process. The new process now takes more notice of applicants who already have a line of credit against their home.

The new rules mean Canada's big banks are starting to take their customer's entire debt obligation into account.

So, even if you have a balance of zero on your HELOC, you might not be able to get a new mortgage.

READ: How will OSFI’s new mortgage rules affect home buyers?

What is a Home Equity Line Of Credit?

A HELOC is a secured form of credit. Like a credit card, borrowers can pull from it whenever they need, so long as they don't exceed the approved amount. Once secured, borrowers can use it and pay it back as often as they'd like.  The lender simply uses the home as a guarantee that the money will be paid back.
They can be combined with a mortgage or taken out on its own.

READ: Toronto Is Canada’s Top Spot For Multiple Mortgages On A Single Home

What is changing?

Prior to November 5, if you had a HELOC and were applying for a second mortgage, lenders only looked to confirm you could afford the payments on the money you owed.

If you owed a portion of your HELOC, lenders would calculate assumed payments based on the owed balance, the lender's posted fixed rate and a 25-year amortization.

If you were to apply for a second mortgage and hold a HELOC today, lenders require you to prove you can carry the entire HELOC limit plus the payments on your second mortgage.

Under the new rule, lenders must now assume that you might take out the entire sum of your loan, even if you have never touched it in the past.

READ: Are Canadians failing the stress test after the interest rate hike?

According to Rate Spy, the new rule will put tens of thousands of borrowers over the maximum allowable debt-ratio limit.

The new rules will also require new HELOC applicants to pass a "stress test." Much like the mortgage stress test, this ensures applicants can repay the debt at a higher interest rate.

The Loop Hole

There is some good news for existing HELOC holders. Most of Canada's big banks have yet to tighten up their approval process. And, according to Global News, the new rules only apply to new applications.

Still, it's better to be safe than sorry.

If you hold a HELOC and still want to apply for a second mortgage you might want to consider locking in, reducing or closing your line of credit. Alternatively, you could consider finding a lender who doesn't implement the policy, but who might charge you more in interest.

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