Home Equity line of credit options
A secured line of credit or HELOC is a re-advanceable mortgage product that is an alternative option to a traditional mortgage for your home financing. We have many years of experience helping our clients with their home equity line of credit options.
*Currently the government of Canada limits new lines of credit to 65% of the value of your home.
*For clients that require 80% loan to value many lenders are able to approve a line of credit to 65% of the value of your home and then a fixed or variable mortgage for the remaining 15% of your financing amount in order to achieve a total lending amount of 80%.
*These products are not available for mortgages where clients require more than 80% loan to value financing or insured mortgages. As with all mortgage products there are positives and negatives to consider when you are deciding if a secured line of credit is a good fit for you.
The Home Equity line of credit positives:
*Your funds are re-advanceable meaning you are able to borrow a predetermined available amount as required, when you no longer require the funds you are able to repay them anytime without penalty or restriction.
*You only pay interest on the funds you use.
*Your payments are interest only and do not include any principal payments, this results in lower monthly minimum payments and gives you added creativity in managing your personal cash flow.
*You are able to repay your funds owing at any time and any amount without restriction.
The Home Equity line of credit negatives:
*You are charged a higher interest rate compared to a variable rate mortgage in exchange for the flexibility you are afforded with this product.
*There is no preset principal repayment so additional discipline and planning is required to repay the mortgage.
All in one banking:
There are several all in one lending products that are very well marketed including the Manulife One, that when used strategically can yield good results for you. However when it is not used strategically the end result is the lender making a lot of money (and you not).
Within the all in one banking and mortgage/ line of credit product, the Manulife One is the most well marketed however almost all of the major banks have a similar product, with their various functionalities differing lender by lender.
In fact, when we are working with our clients and taking an objective view, based upon product options, pricing, and flexibility, the Manulife One is in a close race for the second or third best option in Canada. We have included below a case study of the all in one banking and mortgage/ line of credit product that outlines some of the advantages and also some potentially better alternatives.
The “All In One” case study – and a better alternative:
Most clients who obtain the all in one product simply replace their mortgage with a secured line of credit, add in all of their debts to lower their cost of borrowing, and then start using the product as their daily bank account because regular deposits result in less interest being paid. Lets look at a case study to see what the true benefit is of this product and some potential alternatives:
All in one banking option:
Lets assume we have a home Value of $465 000, mortgage amount of $250 000 at 3.5%, credit cards of $25 000 at 18%, and a vehicle loan of $25 000 at 4.0%. = Total debt of $300 000.
Manulife or another all in one lender will put this $300 000 into a line of credit at “Manulife One Prime” which is actually bank prime +.5%, currently 3.5%. The thought is we lower the cost of borrowing and payment amounts on the higher interest debt and reduce it from 18% to 3.5% and then use those extra funds that you are currently paying these credit cards and loans to instead pay off your mortgage faster. Additionally the lender has you putting all of your personal savings and extra monthly funds into your line of credit to repay it faster.
This is a great concept in theory however we have had more clients experience the exact opposite results – yes they will consolidate their debts and lower their cost of borrowing, however very few clients meet the “manulife number” calculation as life happens and they choose not to put all of their excess savings into repaying this line of credit.
The end result of this is you are left with a product that you pay only the interest and very little of the actual principal amount, have perpetual debt AND Manulife is charging you a higher rate than you could be paying.
The alternative strategy to all in one banking:
Using the same above example, we can take the consolidated debt amount of $300 000 and place it in a mortgage at prime -.4, currently 2.6%, the results of this are two fold.
*The first is you are regularly paying both principal and interest thereby repaying your mortgage consistently.
*The second is you are saving $2700 in simple interest per year based upon your reduced rate from the Manulife one rate of 3.5% to the variable mortgage rate of 2.6%. This is an extra $13 500 you are paying over five years to Manulife for their line of credit product when in many cases it is not the best fit for our clients.
We do have some clients who would still like a line of credit for future investment and contingency reasons, for these clients we can absolutely add a line of credit to this mortgage product. In this case we would approve a mortgage at prime -.4 for $300 000 and a line of credit at prime +.5 for $72 000, if the line of credit is never used there are no interest charges and you only pay for the funds you access.
Based upon numerous client experiences and numerical data it is clear that there are many good uses for a secured line of credit. Unfortunately for most clients, when they obtain a line of credit it is often not the best product fit for them and it costs them thousands of extra dollars per year in interest. When you are considering selecting a secured line of credit or an all in one banking account it is important that you consult a knowledgeable and trustworthy mortgage professional who is able to clearly explain the advantages to you of your various options.
We would be happy to consult with you on your financing needs and goals, please feel free to contact us via phone, online application, or by completing our quick online contact form.