As I mentioned in my previous blog posts about Covid-19 and credit, Canadian banks would likely start tightening up secured line of credit products to avoid financial risks like defaults and insolvencies.
Banks can accomplish this in three ways. One, they can arbitrarily reduce available credit limits. Two, they can disallow the ability to use a line of credit for certain objectives such as providing a down payment on another property, for example; or three, they can close them altogether.
Ultimately, a bank's decision to alter a person's credit facility on a home line of credit product will depend on factors such as repayment history in the last three to six months, and whether a person used the deferral option due to unemployment.
The Federal Government's assistance program called CERB, which stands for Canada Emergency Response Benefit, is temporarily helping Canadians make their bill payments. Additionally, many have also used mortgage deferral options for up to six months to help stay afloat without a salary or wage.
In light of the foregoing and also considering the CERB and deferrals are coming to an end banks must prepare for the financials risks that may present themselves if borrowers start drawing from home lines in order to supplement income.
If it becomes apparent that lines of credit are used as income replacement, then we will witness banks take restrictive measures immediately.
Home Equity Lines of Credit have the capability of expanding risk for banks. After all, when people have limited income during recessions and times of higher unemployment rates, they turn to their home lines because they are inexpensive due to a low interest-only payment, and are easily accessible.
Unfortunately, if lockdowns continue or the economy has a rough restart with continued unemployment, then, of course, this will become reality.
Scotiabank, for example, will no longer allow borrowers to use home equity lines of credit as a form of a down payment on another property. And although other big banks have not employed a similar policy, it wouldn't be unusual if they did.
A Home Line of Credit is a collateral mortgage which is different from a conventional mortgage because it allows the bank to change its terms.
Do you have mortgage questions?
Feel free to call or write.
Sarah A. Colucci
Mortgage Agent, Lic. M14000929
Mortgage Edge, Broker 10680
Direct: (647) 773-4849
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By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929