HELOCs and Lines of Credit have all but dried up for some brokers, while others continue to rely on them for their bread and butter.
HELOCs and Lines of Credit have all but dried up for some brokers, while others continue to rely on them for their bread and butter.
“There’s been a decrease in the number of investor clients and property speculators, definitely,” says Brad Compton, a mortgage agent with Invis. “We have seen fewer HELOCs – in fact, I haven’t done a HELOC since December 2011.”
Growth in HELOCs and other lines of credit have slowed to a virtual standstill, according to a recent Equifax report, describing “very moderate growth in Lines of Credit and HELOCs likely due to housing market speculation and increased regulation.” The March Consumer Credit Trends Report released on Tuesday pegs that rise at a meagre 3.3 per cent from $242.5 billion for March 2012 to $250.6 billion for last month.
Compton isn’t surprised by those numbers, seeing investors turn to more lucrative avenues to access equity.
“Investors are either finding the money somewhere else, or they are just drawing on the equity in their home by taking a normal mortgage,” Compton told MortgageBrokerNews.ca. “Usually they own a home outright, and they will just use fixed mortgage on that. It is better than a HELOC – you can finance up to 80 per cent on a 5 year fixed, as opposed to the 65 per cent you get on a HELOC.”
Verico Canada’s COO John Kelly sees the new regulations on mortgages as having an impact on the HELOC market.
“The new OSFI regulations restricting the loan to value maximum for new HELOC's has definitely had an impact on that products growth in the market,” says Kelly. “In general there seems no doubt that the new regulations have cooled the growth of credit markets in Canada significantly, which of course is the Minister of Finance's express intent - but it also may be unduly cooling the housing market, and presumably the construction and home renovations markets, too.”
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The Equifax report glancingly references the new B20 regulations, but also a drop in property speculation, as investor clients take a pause in an iffy market.
HELOCs are frequently an integral part of the financing strategy of many first-time investors looking to take the equity in an existing property to fund the purchase of another.
Under the new stricter B20 lending guidelines introduced last July, HELOC “A” clients are now limited to 65 per cent loan to values. Still, their brokers are still providing them access to 80-per cent LTVs by combining the HELOC portion with a fixed or variable portion if the HELOC product allows.
That may be so much fine print for some investors, now discouraged from using HELOCs to fund acquisitions – but it isn’t the case for John Friesen, an agent with Verico Premiere Mortgage Centre in Toronto.
“I’ve still been doing them; a lot of my clients have HELOCs and lines of credit,” says Friesen, who always offers HELOCs as an option to clients who are putting more than 20 per cent as a down payment.
“Of those I offer this to, a full 50 per cent of them will probably take it,” he says. “I offer it to all my clients who qualify.”
Friesen touts the advantage of a HELOC for those who don’t have the proverbial “six months of savings” available for a rainy day.
“Clients are eager to get some protection with a HELOC,” Friesen says. “For them, it’s nice to know you can tap into it when you need the money.”
As for the limitations of only being able to draw 65 per cent of the value from a HELOC or line of credit, as opposed to a refinance of up to 80 percent, Friesen discounts the difference.
“Most investors only will go up to 50 per cent of the value of a home on a line of credit – the higher percentage doesn’t become a factor from my experience,” he says, but does acknowledge that a fixed mortgage has advantages over a line of credit, especially in interest savings for the client.
“I have one client that had an 80 per cent line of credit and I just switched him to a 5-year fixed plan,” says Friesen. “Why should he pay prime plus with a line of credit, when he can go under prime with a variable or fixed mortgage?”
That same client is now saving $4,280 annually on a $300,000 home.
Friesen admits that things “have been tighter across the board” in the last year or so, but is glad the lending community is now showing more due diligence and a conservative approach to those clients who have marginal or bad credit.
“From 2005 to 2009, I called those years ‘the Wild West’,” laughs Friesen. “If you had a pulse you could get approved.”
