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Current Rates | Commentary |
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Monthly Commentary Issue 07-10
HELOC Dilemma?
Over the years of being a mortgage broker, I have seen many different changes to the lending world. Many products have come and just as many have gone. Four years ago the buzz word was Line of Credit or HELOC as many refer to it as. It seemed that every other mortgage we were offering was a HELOC. Today they are not nearly as common and for a good reason. Their price is a little off when compared to what else is available.
In October 2008, variable rate mortgages in Canada were turned on their ear during a time experts are referring to as a ‘cash crunch”. Lenders lend money to each other through the Bank of Canada and at that time due to economic turmoil, Canadian banks virtually stopped lending to each other. This shortage of cash caused rates to rise in the variable world very dramatically and in many cases lenders stopped offering variable rates and lines of credit, period. Lines of credit were especially hard to obtain at this time as a result of lenders needing to have large amounts of cash reserve to fund if needed.
Today, those products have returned but there has been a little bit of disparity in the pricing. Straight variable rates have dropped very close to where they once were. Lines of Credit have not been as generous. Perhaps the reserves needed to administer these products are not something the lenders are willing to tie up.
Mortgage consumers who are looking to place mortgages will be guided by the product and pricing today. Many will choose variables because the price of these products are cheaper. However, what about the many consumers who have chosen Lines of Credit in the past? Is that still the right product to get the job done?
I am not saying a line of credit is not a good thing at all. Many people have set up Lines of Credit to have a reserve for emergencies and never drawn on them. If that is the case, that is an excellent use of that product. However, many consumers have used lines of credit to take on actual debt, and never really pay it off. It is those mortgage consumers who need to ask themselves, is this still the right tool for the job?
Variable rates have dropped to a point where the monthly payment (P and I) for a straight variable mortgage is very close to what a Line of Credit would charge for interest only. The difference between these two solutions is that with the straight mortgage, principal is being paid back, and largely with the money you would be paying in interest if you were in a Line of Credit only. If you are interested in comparing the difference in payments and the effects on the outstanding balance between a variable rate mortgage and a line of credit, please reply to my email and I will be happy to send you a schedule showing these options and what that looks like.
Many consumers can benefit from not only getting lower rates on a straight mortgage product, but also receive the flexibility of having the LOC there as well. Of course, if you have questions about this, don’t hesitate to call or email as everyone's situation is different and deserves one on one attention to make sure it is done right.
Like I have always said, mortgages are a tool and every professional makes sure they use the right tool for the job.
As always, please don’t keep me a secret, if you find this and my other commentaries helpful please share them with your family and friends. I would love more clients like you.
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