HELOCs, also known as a Home Equity Line of Credit, provide homeowners with the opportunity to capitalize on the available equity in their property.
One benefit of HELOCs is the ability to borrow varying amounts over time, with interest rates tied to the Prime Rate. These loans are "open" and can be paid off without penalty, and can be used as needed up to the credit limit. The loan is considered revolving because once it is paid back, the borrower can access the available credit again.
It is recommended to borrow only the required amount to keep monthly payments low and prevent additional debt and interest payments. However, HELOCs can be risky for undisciplined borrowers because of the fluctuating interest rate and the feeling of having unlimited credit.
What does the term Home Equity Line of Credit (HELOC) mean?HELOCs, similar to credit cards, have variable interest rates which can result in changes to your monthly payment depending on the amount borrowed and current interest rates during a specific time frame. This makes them essential.
When you have a HELOC, the equity in your home determines the maximum amount you can borrow, which is like a credit card's credit limit. You can choose to use some or all of this limit, and you will only be charged interest on the amount you actually borrow. If you haven't borrowed any money yet, you won't have to pay back anything or any extra fees.
- Credit cards have higher APRs compared to HELOC rates.
- Possibly eligible for tax deductions, the interest paid.
- Withdrawals and repayments that can be adjusted according to individual needs.
- Possible enhancement to one's credit record.
- The loan is secured by the home.
- The share of the borrower's home equity is diminished.
- Rise in interest rate if Prime Rate rises.
- Ability to quickly accumulate a large balance.
-->Regulatory Agency & Home Equity Lines:The Office of the Superintendent of Financial Institutions (OSFI) has made a significant move to ensure that financial institutions regulated by the federal government are adequately equipped to deal with the potential dangers of unresolved consumer debt, which could potentially expose lenders to adverse economic impacts.
Therefore, OSFI declared that starting from the conclusion of 2023, the highest permissible loan-to-value (LTV) ratio for Combined Loan Plans, as referred to by OSFI, will be lowered from 80% to 65%. In our industry, re-advanceable mortgages are often known as Combined Loan Plans due to their inclusion of home-equity lines-of-credit (HELOCs).
According to Mortgage Professionals Canada, Canadian homeowners typically use just around 30% of their approved HELOC limits. Additionally, it has been noted that only about 6% of all HELOCs are fully utilized.
Furthermore, MPC has stated that only one out of every thousand borrowers with HELOCs was more than 90 days late on their payments. They have also mentioned that the default rates for HELOCs are approximately half as high as the default rates for mortgages. (In Q1 2022, Equifax reported that the proportion of mortgages in Canada that were in default was 0.18%.)
The Office of the Superintendent of Financial Institutions (OSFI) is set to introduce new guidelines that will lower the borrowing capacity of certain Canadian homeowners due to the increasing household debt, which is causing concerns for our country's financial system.
The guidelines are specifically aimed at combined loan plans (CLPs), which are also referred to as re-advanceable mortgages. Stated by OSFI, CLPs combine a standard mortgage loan that gradually reduces the principal amount with a home equity line of credit (HELOC). As you pay down your mortgage principal each month, that money becomes immediately available in a line of credit up to a certain threshold.
Do you have a mortgage question? I would be more than happy to assist you. Please do not hesitate to reach out.
Sarah Colucci, Mortgage Agent Level
Sherwood Mortgage Group, Broker 1217
#HomeEquity #HELOC #Mortgage #Finance #CreditLines #RealEstate #FinancialPlanning #OSFI #Borrowing #Debt #Homeowners
By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929