You may or may not have noticed what’s going on but there’s a war on debt that’s slowly taking shape through subtle and behind-the-scenes policy changes by risk departments, and it’s headed straight for the average everyday mortgage borrower. Currently, the average debt size on HELOCs (Home Equity Lines of Credit) is $65,000 – across Canada. That’s a huge number. HELOCs carry a lot of benefits:
- The payments are only interest. They are very cheap to manage and maintain per month, so you never have to make more than the minimum payment.
- You can pay them down and borrow against them anytime, up to the limit. Without having to underwrite or do anything.
- They offer the best rates versus other credit facilities. Typical HELOC rates are set at Prime to Prime+1%. Typical interest on unsecured lines of credit are Prime+3 or more, and on credit cards are in the double digits.
- There are no fees to carry a HELOC except for the interest. Credit cards charge fees. HELOCs don’t.
Now, let’s look at the biggest negative of HELOCs. It’s simple. People treat HELOC debt differently than regular mortgage debt because they are so cheap to carry per month, and so easy to access. I know some clients who have told me they have NO mortgage (congrats!). Then I do a credit check and see a $500,000 HELOC balance (Oh, that’s my HELOC – it’s no big deal).
Right! No big deal! Until it becomes a big deal. Like, it’s becoming a big deal right now, and here’s how.
Slowly over time we have seen HELOC limits go from 80% to 65% where we are today. This means no more than 65% of a mortgage can be set up as a form of a line of credit.
Example $1,000,000 house can have a HELOC of up to $650,000 and not a penny more
Slowly over time we have also seen the addition of a stress-test. HELOCs were always the hardest mortgage to qualify for, with each lender and bank having their own qualifying rules. Now, however, you will really find it hard – where we’re seeing rates of up to 6.95% to qualify.
And now we’re seeing further changes to how existing HELOCs are being underwritten. Let me explain.
If you have an existing HELOC with $100,000 limit but $0.00 balance, most banks and lenders will simply use $0.00 as your repayment since there’s no usage of that HELOC.
Until this week.
Two major lenders in Canada, TD Bank and First National, have adopted a new policy where instead of using $0.00 as the repayment, they assume you will be leveraging that HELOC in the future to $100,000 (the limit) and now they are qualifying as if you had done that. Ouch!
(Some readers of this blog will call this simply smart and prudent underwriting. Some borrowers who read this blog will be very mad).
This is quite the change because $100,000 is a typical HELOC I see these days. The reality is, a lot of people have HELOCs that have much, much higher limits than that, and a lot of those HELOCs are never nor have ever been used.
Here’s another reason why the banking industry screws you without your knowledge: MOST people who go to a big bank with a big down payment get a HELOC without knowing it. That’s right. It’s glossed over. It’s a smart way for that bank to tie you in at renewal and now, to make it difficult to get financing elsewhere. They put it in as a value-add, you don’t realize it until you go ask for a mortgage elsewhere and suddenly? BOOM! That HELOC you never used is now being counted against you and you can’t buy another investment property. Awesome! Thanks Bank!
Or, here’s another typical scenario – and believe me this one happens way more often. People ask for a HELOC. They get it. They swear it’ll only be used for emergencies. Then they dip into it. And again. And then one of them gets pregnant (usually the woman – ha!). And so now they’re on 60% income for a year with huge daycare bills. Then they want to renovate the basement to have more room. And suddenly they owe $250,000 more than they did a short 3 years before with NO plan to get that paid off. Ever.
Of course, with problems, come solutions. Introducing the SUPER DUPER GET THAT HELOC OFF MY LAWN MORTGAGE. (I made that up it’s not really called that). There are some AMAZING programs out there with some AMAZING MORTGAGE LENDERS (not banks but lenders) that will get rid of that mortgage AND HELOC balance in one shot, and, transfer it to a very competitive rate.
- This will force you to pay that HELOC and mortgage down.
- This will not give you the ability to borrow against your equity again, unless you re-qualify and do the whole dance all over.
- This will force principal payments and most important, give you a light at the end of the tunnel.
If you’re one of the tens of thousands of Canadians who are simply stuck in the mud, tires spinning, car is moving backwards not forwards, and you don’t or can’t find a way out, let’s get rid of that HELOC once and for all and figure out a solution so that we can get moving forward and join the war on debt.