Category Archives: HELOC

Why consumers should be wary of using the wildly popular home equity lines of credit as ATMs

A federal agency is warning consumers addicted to home equity lines of credit — a product increasingly driving debt —  could find themselves at increased risk of default if the housing market corrects.

“Falling housing prices may constrain HELOC borrowers’ access to credit, forcing them to curtail spending, which could in turn negatively affect the economy,” the Financial Consumer Agency of Canada wrote in a 15-page report out Wednesday. “Furthermore, during a severe and prolonged market correction, lenders may revise HELOC limits downward or call in loans.”

The timing of the release from FCAC is coincidental but it comes just two days after the Toronto Real Estate Board reported new data that clearly show the housing market in retreat. May sales dropped 20.3 per cent from a year ago and prices were off 6.2 per cent from April amid a massive surge of active listings.

The report, titled Home Equity Lines of Credit: Market Trends and Consumer Issues, focuses on the massive explosion of the HELOC market which grew from about $35 billion in 2000 to $186 billion by 2010 for an average annual growth rate of 20 per cent.

During that period, HELOC became the fastest growing segment of non-mortgage consumer debt. In 2000, the HELOC market made up just 10 per cent of non-mortgage consumer debt but had climbed to 40 per cent by 2010.

“At a time when consumers are carrying record amounts of debt, the persistence of HELOC debt may add stress to the financial well-being of Canadian households. HELOCs may lead Canadians to use their homes as ATMs, making it easier for them to borrow more than they can afford,” said Lucie Tedesco, commissioner of the FCAC. “Consumers carrying high levels of debt are more vulnerable to the impact of an unforeseen event or economic shock.”

The average annual growth of the HELOC market slowed to five per cent from 2011 to 2013 and has averaged two per cent since, the slowdown at least partially attributable to tougher federal guidelines on how much home equity consumers can access through a HELOC.

HELOC products have become popular because they work like credit cards or unsecured lines of credit, in terms of the ability to draw money from them. They are usually backed by a collateral charge on your home but a HELOC most often gives the consumer the ability to withdraw and pay off their HELOC with flexibility — financed at a rate which is usually close to the prime lending rate at most banks.

Unlike a mortgage, a HELOC is a demand loan, and while most borrowers can pay interest-only on them, the loans are callable by the bank at any moment — a practice rarely seen in the Canadian market at this time.

A positive feature of a HELOC is the ability to consolidate high-interest debt from items like credit cards, and the report says from 1999-2010, 26 per cent of loans were used for just that. Another 34 per cent were used for financial and non-financial investment. The remaining 40 per cent was used for consumption or home renovation — a market Altus Group said was worth $71.4 billion in 2016.

The federal agency noted that most HELOC products sold today are part of what is called readvanceable mortgage. In those cases a HELOC is combined with the mortgage and as the mortgage is paid down, the available credit in  HELOC increases.

“In recent years, lenders have been strongly encouraging consumers to use readvanceable mortgages to finance their new homes,” said Tedesco.

She said complaints have shown people are not understanding the product. “It’s not that they’ve been bamboozled,” said Tedesco. “One of the things that we will be doing with the results of our research is trying to see how we can improve the disclosure around readvanceable mortgages, and will communicate to the financial institutions our expectations on that front.”

Source: Financial Post – Garry Marr | June 7, 2017

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Home equity lines of credit: What you need to know

Figures show that  22 per cent of homeowners, an estimated 2.15 million Canadians, had a home equity line of credit in 2014. They owed an average of $57,000.

The money can be plentiful, relatively easy to get, and hard to resist.

A home equity line of credit can help improve your living circumstances and possibly lead to financial gain.

But according to an RBC report last week, Canadians’ outstanding debt on personal lines of credit hit $266 billion as of April, a 3.2 per cent gain over last year.​ Yesterday, CBC News featured one Toronto-area couple with two home equity lines of credit totalling $370,000.

Since we’re talking about debt that can climb to potentially dangerous heights, it pays for consumers to understand how a home equity line of credit works.

Here are five key things to know if you’re thinking about signing up — or if you already have one.

How do they work?

You have to apply with a lender to find out whether you qualify, the Financial Consumer Agency of Canada says on its website.

Home equity is the difference between the value of your home and the unpaid balance of any current mortgage. “Home equity increases with time as you pay your mortgage down and as the value of your home increases,” the agency said.

‘It’s easy debt and it’s very accessible.’ — Laurie Campbell

Government rules limit the maximum amount of money available to 65 per cent of a home’s appraised value. However, a home equity line of credit can be combined with a regular mortgage for a maximum of 80 per cent of a home’s appraised value.

And, like credit cards, you make minimum monthly payments on the amount borrowed and you do not have to pay off the full balance each month, the website Get Smarter About Money advises.

Who has them?

According to the Canadian Association of Accredited Mortgage Professionals, 22 per cent of homeowners — an estimated 2.15 million Canadian homeowners — had a home equity line of credit in 2014. They owed an average of $57,000.

Of that 2.15 million homeowners, about 200,000 owed nothing, or have a “nil” balance.

“Among Canadian homeowners who have [home equity lines of credit], not all the available funds have been accessed,” the report found, adding that the average approved line of credit is $135,000, but the actual amount owed averages about $57,000.

The advantages

“It’s easy, accessible cash at a very cheap price. The banks make it so easy for you to obtain it,” Toronto software engineer Murad Ali told CBC.

The flexibility can be great, bankruptcy trustee Doug Hoyes told CBC News.

“With a mortgage, everything is fixed. I can’t just go back and get more next week and get re-approved,” Hoyes said. “Once you’ve negotiated the [home equity] line of credit and it’s set, you can go up to that limit whenever you want.”

And as long as you are fulfilling the terms of the loan, there is nothing more you need to do or worry about, said Hoyes of the firm Hoyes Michalos & Associates.

“Generally you can pay as much as you want — as fast as you want — and that lowers your overall interest costs,” he said.

Another advantage is that the money available has been cheap to get lately, he said.

“Variable-rate lines of credit have been great the last few years because interest rates have been falling,” he said.

Laurie Campbell, a debt counselling expert, also remarked on the current lure of affordable money.

“It’s low-interest debt,” said Campbell, who is the CEO of Credit Canada.

And, borrowing can pay off, she said.

“In some cases if you are using it to improve your home you could be increasing the value of your home and be farther ahead.”

The disadvantages

‘The bank can alter the terms any time they want. It’s completely open.’— Doug Hoyes

Home equity lines of credit are one of the fastest growing types of debt in Canada, she said.

And they can also be habit forming.

“It may seem innocent enough to start, but it’s addictive. You are increasing your cash flow by having the line of credit,” said Campbell.

A big worry is that it could take years to pay off a home equity line, and people could wind up “stealing from their financial future,” she said.

Another concern is that terms can change with little or no notice, Hoyes said.

“The bank can alter the terms any time they want. It’s completely open,” Hoyes said.

“The bank may decide: ‘We are cutting your limit in half: Instead of $100,000, now it’s $50,000.'”

And the interest rate can change, too, Hoyes said. “And there’s nothing you can do about it. It’s potentially much more risky,” Hoyes said. “You are at the mercy of the lender.”

The Financial Consumer Agency offers more sobering advice.

“Don’t borrow more than you can afford. If you are unable to repay the amounts you have borrowed, plus interest, you could lose your home.”

What people may not consider

The main reason to take out a home equity line of credit is to get the money, use it, and then pay it off, Campbell said.

“Have a very specific purpose for it and a very specific course of action to repay it within a very specific time period,” she said.

Also, before you take on this kind of debt, or any debt, Campbell suggests thinking twice about whether you really need it.

Hoyes warned that the more debt you have, the less flexible you are.

“If you have a house with no mortgage on it and you want to move to the other end of the country, you can sell your house and move. If you have a mortgage and a home equity line of credit, now you have to make sure you sell the house for enough that you can pay off all the debts against the house.”

And life has a way of changing unexpectedly.

“We don’t assume that we will ever lose our job, get divorced, get sick, that real estate prices will always go up — not down, that interest rates will go down — not up,” he said.

“Everything is great right now,” he said.

But we can already find “a cautionary tale” in places like Calgary and Fort McMurray, Alta., he said, since house prices in both places have come down considerably.

As well, Campbell said, be mindful of one other thing, even if you have a great relationship with your bank.

“The bank is a business. The bank is going to do what they need to do” she said.

“And if you are behind with your payment, things could get ugly.”

Source: By Mike Karapita, CBC News Posted: Jun 11, 2015 5:00 AM ET

The national lust for home equity lines of credit: should we worry? Low interest rates. High credit limits. Lines of credit can turn your home into an ATM

Murad Ali, his wife, Arsheen Haji, and their daughter, Shanzé, in their custom kitchen paid for with a home equity line of credit.

Murad Ali and Arsheen Haji live large thanks to easy access to their home equity lines of credit, joining the many Canadians succumbing to the same temptation.

For the Toronto-area couple, it all started back in 2009 with a lavish $78,000 wedding.

Then came numerous overseas vacations. When touring Egypt, Ali bought four souvenir papyrus scrolls for $6,000. In Italy, Haji picked up a $7,000 Chanel bag.

Home equity lines of credit

Arsheen Haji and Murad Ali on vacation in Egypt in 2012. They paid for their trip with a home equity line of credit. (Murad Ali)

After the birth of their daughter, the couple moved into a newly built home and spent more than $100,000 on upgrades, including a custom kitchen, hardwood floors and a high-tech fireplace.

The wedding, trips and high-end purchases were made possible with cash from two home equity lines of credit secured against a couple of investment condos the family owns. The debt from those loans now totals $370,000. They also recently got an unsecured $30,000 line of credit to buy solar panels for their new house.

Line of credit addiction

‘It’s like turning your house into an ATM’  
– David Trahair, chartered accountant

“We are addicted for sure. Who wouldn’t be addicted to something so easy [to get]?” says 35-year-old Ali about the free-flowing lines of credit that have enabled him to splurge on the finer things in life.

“It’s easy, accessible cash at a very cheap price. The banks make it so easy for you to obtain it,” says the software engineer.

The couple is part of a national trend. Canadians love their lines of credit, which feature interest rates that are much lower than credit cards. Ali pays just 3.25 per cent interest on his home equity lines. Credit card rates typically hover around 20 per cent.

According to an RBC report last week, Canadians’ outstanding debt on personal lines of credit hit $266 billion as of April, a 3.2 per cent gain over last year.​

It should be noted that the rate of growth is slowing and sits well below historical highs. But one thing’s certain. The total debt keeps mounting.

Home equity credit lines allow Canadians to borrow big – up to 80 per cent of a property’s value when combined with a mortgage. According to the Canadian Association of Accredited Mortgage Professionals, 22 per cent of homeowners had a home equity line of credit in 2014. They owed an average of $57,000.

“It’s like turning your house into an ATM,” says chartered accountant David Trahair, who has written numerous books on personal finance. “If you’ve got a house, especially in Toronto with these insane values, you can borrow an incredible amount of money against the house.”

Will it ever end?

Trahair worries that with potentially high credit limits, those lacking self-control can easily get in over their heads. “For spenders, the low interest rate environment is almost like a drug. It’s almost impossible for them not to take advantage of these low interest rates and borrow.”

But the Canadian Bankers Association is not worried. It states that Canadians are responsible borrowers and that banks are prudent lenders. Before granting a home equity line of credit, “banks complete a thorough due diligence process,” said spokeswoman Kate Payne in an email.

Ali is now considering borrowing more money against the equity in his new home. He admits he’s antsy about adding to his debt when the family already has a substantial mortgage on their 5,000-square-foot house.

But the place is still largely unfurnished and he’s yearning to install a $40,000 glass railing for the staircase.

“Without the glass railing, the look of my stairs is not doing it justice,” he says.

Right now, the couple could probably afford the extra loan payment. Currently, both he and Haji, a business analyst, can cover the bills and still have money left over for savings.

BMO senior economist Benjamin Reitzes notes that current low interest rates mean high debt levels aren’t bankrupting Canadians.

Proceed with caution

But the big question is what happens if rates go up or the economy takes a tumble. “If we were to get a big increase in the jobless rate or a big increase in interest rates, then there might be a little bit of trouble but, for now, neither of those two things are forecast,” says Reitzes.

Trahair is less sanguine about the situation. He says any unexpected event, from an illness to a decline in the housing market, could wreak havoc for a highly indebted family. He calls the lust for lines of credit “a ballooning debt bubble that eventually is probably going to burst.”

While Ali and Haji like to spend, they believe they’re behaving responsibly and say they’re aware of potential pitfalls. That’s why they’re still undecided about another loan.

“If you get a line on this [house] and God forbid something happens to me or [my wife] and we are unable to sustain our lifestyle or stream of income that we have, then we would be in trouble and that may lead to us losing this house,” says Ali.

And that’s why some rooms in the family’s home remain empty. Ali shows CBC News his large, mostly barren master bedroom and talks about his grand plans to furnish it — sometime in the future.

“Without the credit line, it’s slow,” he laments.

But things could always change. The couple says just last week the bank called, inquiring if the family was interested in another loan.

Source: By Sophia Harris, CBC News Posted: Jun 10, 2015 5:00 AM ET