HELOC

How To Access Your Home Equity

There are a few possible reasons to access your home equity, some are:

  • Investment purposes: to buy an investment property or invest in the market (stocks, mutual funds...)
  • Consolidate debt: move high interest debt into low interest debt
  • Home purchase: buying a home that requires a larger mortgage amount

Canadians are taking advantage of today's low rates and locking into 5 and 10 year fixed mortgages. What happens if the homeowner needs to access additional equity prior to mortgage maturity?  The options are:

Increase And Blend Mortgage

I believe this option will be very popular as more homeowners lock into historically low rates and for most, it won't make sense to break the mortgage in the future.  An example would be: current mortgage amount & interest rates are $300,000 and 3.09%. The homeowner requires to access an additional $150,000 of their home equity.  They would add $150,000 to their existing mortgage balance of $300,000 at current market rate for the remaining term. In this case if the homeowner is 3 years into the 5 year term, the $150,000 would be lent at the 2 year term mortgage rate. The costs associated with an increase and blend option are completing an appraisal on the home and legal fees to register the new mortgage addition.

HELOC: Home Equity Line Of Credit

Secured lines of credit are a great way to access your home equity. The borrower only pays for what they borrow and the funds can be accessed again since this is a revolving credit (you can access whatever is paid back). The costs associated with this option are appraisal and legal fees which are sometimes covered or subsidized by the lender.

Refinance Mortgage

This requires breaking the mortgage, paying a penalty, appraisal and legal fees. It is the most expensive option upfront, however it might be the best option if the homeowner is coming from a higher interest rate mortgage and locking into a lower interest rate mortgage.

It is important to sit with a mortgage professional to discuss your needs and run through the numbers to see which option makes more financial sense.

To discuss your personal options and complete the numerical analysis, please contact me.

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Bad News If You Are A Real Estate Investor Or Self Employed

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OSFI, Office of the Superintendent of Financial Institutions, which regulates the banking system in Canada is proposing to limit the home equity lines of credit (HELOCs) to 65% of home value from the current 80%.  This is a significant change for the following reasons:

  • Real estate investors access their home equity to finance investment properties (downpayment for buying an investment property, renovating an investment property until the property is refinanced and emergency funds if required)
  • Self employed Canadians access their home equity to fund business capital requirements, cash flow requirements, as well as safety net if urgent matters arise

Canadians have taken on significant amounts of debt over the last few years (debt to income ratio is at all time highs around 1.5:1 ratio), however the mortgage delinquency rate in Canada is less than 1%.  The new HELOC change will have a significant impact not only on self employed Canadians and real estate investors but also other Canadians who use their HELOCs to invest into the stock market to create a tax deductible loan and be tax efficient.

In my opinion, OSFI is overreacting by reducing HELOCs to 65%.  75% of home values would be a reasonable change. Afterall, Canada is known for moderate changes.  Time will tell if this move is a good one for the economy and protects the housing market from a real estate bubble.

To discuss how these changes will impact your mortgage financing needs and options to address your capital requirements, please contact me.