Home Equity Line of Credit (HELOC)

Did you know that Canadians have $207 billion worth of home equity line of credit with big banks? This is very dangerous and here’s why.

Rising Rates

The Bank of Canada will likely continue raising its prime lending rate. This process started last summer and the bank has 5 more chances to increase the rate this year. The home equity line of credit is a variable rate product. Thus, it fluctuates with the prime lending rate. Rates of a home equity line of credit is prime plus some small factor. So when the prime lending rates of banks go up, then so does the rate of the line of credit.

Independent Bank Increases

Here is the second threat. Banks have the ability to raise rates on the home equity line of credit independently. That means, they can “arbitrarily” bump the rate without asking permission or waiting for the prime rate to change! Doubtful that this will happen? It already has! TD has already sent out letter to their clients to warn them that effective June 3, the rate of the home equity line of credit will rise by an average of 0.2 to 0.5%. TD itself hold about $73.4 billion in home equity line of credit of the $207 billion.

The Good and the Bad

The home equity line of credit is a smart way to borrow money for expenses that you need little time to pay off. Why? Because the rates are much lower than credit cards, they revolve (meaning you can pay them back without penalty like a mortgage) and during the period of the loan, you can pay interest only. The problem is that a lot of Canadians are not using them that way. They are abusing them by relying on them to maintain a lifestyle or buy things that they can’t afford.

It is thought that TD is getting nervous because any of the home equity line of credit that they hold are on houses that have mortgages with other lenders. That means that if something goes wrong, the mortgage lender gets paid first, and TD is in second position. So they are mitigating their risk with the increase.

A rate increase of 0.5% on a $70K home equity line of credit would result in an extra $350/year of payments. This increase is compounded by the 0.75% increase that has happened since last summer.

Robert Floris is a Mortgage Broker. His office is located at 651 Fennell Avenue East in Hamilton, Ontario. If you would like to speak with Robert, he can be reached at 905-574-9200 #215. Alternatively, you can email Robert at mortgages@robertfloris.com.

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