Home equity lines of credit are demand loans

HELOC pros and cons

Home Equity Lines of Credit (HELOCs) have become increasingly popular among Canadian homeowners, providing flexible access to funds using the equity built up in their properties.

It is very important to understand the pros and cons of HELOCs, particularly in light of high interest rates and the fact they are demand loans that can be called by the bank at any time.

Pros of home equity lines of credit

1. Flexible access to funds: One of the primary advantages of a HELOC is its flexibility. Borrowers can access funds on an as-needed basis, making it an excellent option for ongoing expenses like home renovations, education costs, or unexpected emergencies. This flexibility allows homeowners to use funds when required and pay interest only on the amount they use.

2. Lower interest rates compared to other credit options: Despite the potential for higher interest rates compared to traditional mortgages, HELOCs often offer lower rates than other unsecured credit options like credit cards or personal loans. For homeowners with a strong credit history and substantial home equity, a HELOC can be an attractive alternative for borrowing funds at a lower cost.

3. Revolving credit: A HELOC is a revolving line of credit, similar to a credit card. Once the borrowed amount is repaid, the available credit is replenished.

Cons of home equity lines of credit

1. Variable interest rates: HELOCs typically have variable interest rates tied to the prime lending rate, which can fluctuate with changes in the economy. While this means the interest rate could be lower during periods of economic growth, it also exposes borrowers to the risk of higher interest rates during economic downturns. The average rate today on a HELOC is 7.45% (prime plus 0.50%).

2. Risk of over-borrowing: The accessibility of funds through a HELOC can lead some homeowners to over-borrow, using their home equity for non-essential expenses. This behaviour can lead to increased debt and financial strain, particularly if interest rates rise significantly.

3. Rising interest rates: With a HELOC, homeowners may face increased financial pressure when interest rates rise. As the interest portion of the monthly payment increases, borrowers might find it challenging to keep up with the rising costs.

HELOCS are demand loans

One crucial aspect of HELOCs in Canada is their demand loan nature. Unlike traditional mortgages with fixed repayment schedules, banks have the right to call the loan due at any time.

Why might a bank call the balance of a HELOC?

1. Decline in property value: If there is a significant decline in the value of the property serving as collateral for the HELOC, the bank may decide to call the balance to mitigate potential losses.

2. Changes in the borrower's financial situation: If the borrower's financial circumstances deteriorate, making it uncertain whether they can continue to meet their debt obligations, the bank might decide to call the HELOC balance to limit its exposure to risk.

3. Regulatory changes: Changes in banking regulations or economic policies can also influence a bank's decision to call the balance of a HELOC. For instance, if there are substantial shifts in lending practices or if new regulations require banks to tighten their lending standards, they may reassess existing HELOC accounts and potentially recall the balance.

If you would like a no obligation review of your current HELOC or have any other questions please email [email protected] or you can book a time for a chat here, on my calendar.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.


Mortgage solutions for the self-employed

Mortgages for self-employed

It is no longer as easy as it once was for the self-employed to obtain mortgage financing.

If you have tried to secure a mortgage recently with an institutional lender, you may have already found that out for yourself.

In the past, all you had to do was state your income to your lender without any third party verification. As long as you had a great credit rating, that was good enough then, but not any longer. Now you have to provide documentation to prove you have the ability to make your mortgage payments.

There are still good options available with traditional lenders such as banks or credit unions but you will have to prove you are declaring a “reasonable” income for your profession on your tax returns and also have a great credit rating.

Those two factors combined could be a challenge for many who are self-employed as their accountants may be minimizing their income declared for tax purposes, which is great unless you are planning to secure new mortgage financing.

With these standard mortgage programs, you will either require a minimum 35% equity or if you have less than a 20% down payment, a lender will require a minimum of two years proof of income as self-employed.

The good news is there are many alternative lending options for self-employed clients who no longer qualify with a traditional lender. Those lenders are the market’s response to consumer demand spurred on by the tighter mortgage regulations.

These are reputable companies that offer alternative mortgage products to consumers who can no longer qualify with conventional lenders. They fill an important role in fulfilling the dreams of home ownership for Canadians or have assisted with financing needs in other ways such as accessing equity or refinancing to pay off high interest debt.

Many of those lenders, who currently offer prime mortgages, are now expanding their offerings beyond traditional mortgages to fill this gap in the market and are generally only accessible through mortgage brokers.

My best piece of advice for someone who is self-employed and looking to obtain a mortgage whether it is to purchase a property for the first time or moving up, refinancing a mortgage or looking to purchase an investment property, is be prepared.

Meet with your mortgage broker well in advance to discuss what is required to obtain a pre-approval for your financing. You may have to work a little harder and provide more documentation but there are still many options available to the self-employed.

To ensure that you are in the very best position when it comes time to arrange your mortgage financing, please email me at [email protected] or you can book a time for a chat here on my calendar.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

With higher interest rates, a hybrid mortgage may be right for you

Hybrid mortgages

A fixed rate mortgage or a variable rate mortgage? Why not both?

If you are looking at renewing your mortgage this year, you will definitely be facing some payment shock with higher interest rates. If you are looking to purchase a new home, locking in at today’s higher interest rates may not feel prudent at this time.

With interest rates on both fixed rate and variable, or adjustable, rate mortgages higher at this time, and the talk of some rate reductions in the future, a hybrid mortgage could offer some flexibility and reduce the impact of rising rates.

You can diversify your mortgage risk similar to how you can diversify your investments. A Home Equity Line of Credit could also be included, as some lenders allow the mortgage to be broken into multiple components. You can mix and match terms and types of mortgages in a multitude of combinations.

A hybrid mortgage allows you to manage the risk of interest rate fluctuations effectively in times of economic uncertainty with a fixed rate component and, at the same time, possibly take advantage of the lower rates on the variable rate portion of the mortgage, particularly if rates start to decline during the term of the mortgage.

It can also diversify your mortgage’s conditions—terms, amortization, payment frequency, etc. and spread out your payments so they are not all due at the same time.

The best option is to match the terms – a five-year fixed rate with a five-year variable rate so, if you don’t like the lender’s renewal offer, you are free to easily move to another lender with a better offer instead of possibly paying a penalty on a portion of the mortgage that has a different renewal date.

Hybrid mortgages are collateral mortgages. If your mortgage is divided into different terms that mature on different dates, then you could be faced with a penalty should you decide to break the mortgage early. This type of mortgage is also more difficult to transfer to a new lender, so fees could be charged to make a switch.

If you can’t decide between a fixed rate or variable rate mortgage, a hybrid mortgage could be a good option to limit your interest rate risk. It could be a great option if one party wants to go fixed and the other leans towards variable.

A hybrid mortgage is a more complicated product to consider but depending on your specific needs, it may be the right choice for you. Benefits include the potential for interest savings, flexibility in payments and amortization schedules, and the savings of a variable mortgage mixed with the reduced risk of fixed rates.

As always my best recommendation is to speak with a mortgage professional to review your possible options. Please email me at [email protected] or if you would like to discuss you can always book a time here on my calendar calendly.com/april-dunn

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.


Clearing up misconceptions about reverse mortgages

Reverse mortgage myths

A reverse mortgage is a financial tool that empowers homeowners aged 55 or older to unlock up to 55% of their home's value as tax-free cash.

Unlike traditional home equity lines of credit or conventional mortgages, it offers the unique advantage of not requiring monthly mortgage payments as long as you reside in your home. With its growing popularity, it's crucial to separate fact from fiction and address common misconceptions surrounding reverse mortgages.

Myth: The bank owns your home.

Fact: You retain control and title ownership of your home. You have the freedom to decide if and when you want to move or sell, granting you complete autonomy over your property.

Myth: You'll owe more than your home is worth.

Fact: Clients can qualify for up to 55% of the appraised value of their home, with an average of 33%. Lenders adhere to conservative lending practices, ensuring that equity remains in the home when the loan is eventually repaid. Over 99% of reverse mortgage clients still have equity remaining in their homes after the loan is paid out.

Myth: Reverse mortgages are a last-resort solution.

Fact: Many financial professionals now recommend reverse mortgages as a vital component of a comprehensive retirement plan. It offers unparalleled financial flexibility, enabling tax-free funds to extend the lifespan of retirement savings.

Myth: Existing mortgages hinder eligibility for reverse mortgages.

Fact: Reverse mortgages can be used to pay off existing mortgages and other debts, freeing up valuable cash flow. Imagine the relief of eliminating regular mortgage payments and having more financial freedom.

In addition, it's important to understand two key points:

1. Homeownership: You maintain full ownership of your home as long as you fulfill your obligations of paying property taxes, home insurance and keep the property well maintained. You will never be forced to move or sell your home.

2. Government benefits: A reverse mortgage will not impact any government benefits you may receive, such as Old Age Security (OAS), Canada Pension Plan (CPP), or Guaranteed Income Supplement (GIS).

To determine if a reverse mortgage is a suitable option for you, take advantage of a no-obligation assessment. As a certified reverse mortgage expert and impartial mortgage broker, I can confidentially review all available mortgage options tailored to your unique circumstances. The assessment takes only 90 seconds, so please don't hesitate to email [email protected] or you can book a time for a chat here on my calendar. www.calendly.com/april-dunn

By dispelling myths and gaining accurate information, you can make an informed decision about whether a reverse mortgage is the right choice for your retirement goals. Secure your financial future and enjoy the benefits of this valuable financial tool.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

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About the Author

April Dunn is the owner and a Mortgage Broker with The Red Door Mortgage Group – Mortgage Architects. For over two decades, she has been helping clients to arrange their financing to purchase a home, refinance, or renew their mortgages. Drawing from her extensive experience as a Credit Union manager, a Residential Mortgage Manager with a large financial institution, and as a Mortgage Broker, April has the necessary expertise to design a tailored mortgage plan with features and options that cater to each client's individual needs. April offers a complete range of residential and commercial mortgage financing services to clients throughout British Columbia and the rest of Canada through her affiliation with the Mortgage Architects network.

Contact e-mail address: [email protected] or by phone at: 1-888-561-2679.

Website: www.reddoormortgage.com

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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