Don’t be too surprised to see more of the major mortgage lenders that offer HELOC’s to follow suit with the Prime -%0.5 rate in coming days and weeks ahead.
As borrowers, this is great news with personal capital getting cheaper and cheaper provided that you have good credit, cash flow, and some equity in your home.
If you’re wondering why this is happening now when there is still a lot of talk about rates going up and potentially further mortgage regulations being considered to limit mortgage credit risk, my guess is that the answer has a lot to do with competition.
Mortgage lenders, especially the major banks are investing heavily in attracting and keeping residential mortgage customers. Most of these lenders are integrated financial service shops that want to be selling mortgages, lines of credit, car loans, credit cards, investments, and insurance to their customers for decades to come.
So anything that helps them latch on, or stay latched on to their customers is preferred. Even with that being said, the prime minus Heloc rates would also indicate that mortgage lenders are not overly concerned about the housing market as a whole and believe that home equity leverage is a pretty secure bet.
And even though these market leading Home Equity Line Of Credit Rates are 2.5% today, they could easily be 5% in a couple of years if long term mortgage rates tend to start moving back into more of a historical posture.
But in the short term, Home Equity Mortgages in the form of a line of credit have now become the cheapest source of short term or readily available money you can get your hands on.
So how might you take advantage of these great rates?
Well, if you have a fixed mortgage that still has a number of years remaining on it, but has some prepayment options attached to it, you may want to consider paying some of it down with funds from a Home Equity Line Of Credit to cost average your interest rate down. If you’re planning to be paying down your mortgage faster than the amortization anyway, then this can be a way to get the most benefit out of the exercise by reducing the interest cost today and using your extra cash to pay down the HELOC when you have some available.
Nowadays mortgage companies are putting more and more flexibility into their mortgage programs to suit whatever repayment plan you may have. But if you presently have a mortgage that’s been in place for a couple of years already, the rate may be quite a bit higher and prepayment terms less flexible than what you could sign up for today.
So creating your own mixed rate mortgage may be an option through utilizing these great HELOC rates in the short term.
And if you have equity in your home and you’re utilizing an unsecured line of credit right now at an interest rate 2% above these top end Home Equity Line Of Credit Rates, then it may be worth moving from one to the other.
Obviously, this also represents a very flexible source of capital for all sorts of other uses.
Even if you don’t have a current use, it still can be advantageous to get something in place now at the current offering so that you have ready access capital in the future.
If you’d like to learn more about HELOC rates and terms, give me a call and I’ll make sure you get all your questions answered right away.
First of all, a home equity mortgage is a mortgage program that is designed primarily for self employed individuals who may not qualify for a standard mortgage due to the way they report annual income.
Most mortgage programs qualify repayment by some combination of your wage stub, annual T4 slip, letter of employment, and annual notice of assessment from the Canada Revenue Agency.
With self employed individuals, there can be significantly more flexibility in how and when they are reporting their annual income as well as their allowable expense deductions, causing the above income verification sources to not be sufficient for a bank or mortgage lender’s repayment assessment.
This is where the home equity mortgage programs come into play. Under these programs, provided you have at least 75% of the purchaser price to put down as a down payment, banks and other institutional mortgage lenders will allow you to declare what your annual income is and may even require you to sign a sworn affidavit to that effect in front of a lawyer or notary.
Different programs have different qualifications for the home equity mortgages they support such as the number of years self employed, proof date business or corporation was registered, proof of self employed earnings from arm’s length customers, and so on.
Applicants are still going to have to qualify in all other respects in a similar fashion to a wage earner. This will include an acceptable credit score and credit profile.
And while there are several of these programs around, mortgage lenders are always changing policies, terms, and rates to best suit their portfolio and overall risk management requirements.
As a result, it can be hard to figure out which Toronto home equity mortgage is going to be the best fit for you and your family.
The best approach is to work with an area mortgage broker that works with this type of program on a regular basis and keeps up to date with the changes made by the lenders providing services to this segment of the market.
Mortgage brokers also tend to develop direct relationships with the mortgage lenders, providing them with a stronger voice to properly position your application which would not be possible for just an application at larger. And because brokers do not have any direct affiliations with mortgage providers, they are free to shop the mortgage market for the best possible deal that is available to you at a given point in time.
The recession has been hard on small and medium sized businesses. In many cases, the owners are now scrambling to try and secure additional capital for cash flow shortfalls, lender payouts, and even regular asset replacement.
If you’re business is under almost any type of stress, good luck finding a reasonably priced business loan in terms of interest rates. The “A” lenders are not lending, the “B” lenders don’t exist right now, so all that’s left are the pure asset based lenders in many cases. Not only do they lend on liquidation value of the assets, which by the way can be pretty low in the current economy, but the rates start in the mid teens and go up from there.
The obvious alternative in many cases is a home equity loan. Even with bad credit, a private second mortgage is likely going to cost less than any form of small business financing these days for businesses that are struggling.
The only real problem with this strategy is mindset. Too often, business owners and their spouses are reluctant to mortgage finance their homes any further into debt in fear of losing their home if things get really bad.
This is very understandable and a natural reaction to having to risk more than you’re comfortable with.
But here’s some things to think about.
If a small business has any debt outstanding right now, its likely partially secured by a personal guarantee. If all the home owners have signed the guarantee, then the home equity is already at risk.
Second, if the business is coming through a dry spell due to the recession and can see that things are starting to pick back up, a home equity loan would be less risky that any other form of asset based lending. For example, if the business could secure asset based financing for 24% on a $100,000 versus a home equity loan at 5% for the same amount, the business just saved $19,000 in expenses using a simple interest, no principal repayment calculation. Not only has the stress on the cash flow been reduced, but the business and business owner’s equity has not been diluted by these high rates.
If you’re a small business owner that requires additional capital in your business and has some amount of equity in your home, please give me a call and let me see if we can come up with a better financing solution than what you may be finding in the market place these days.
The basic qualifications are solid credit, loan to value amounts of 75% to 80% of the property value depending on the mortgage program and lender, and a repayment assessment based on the three year fixed term rate for a fully funded mortgage.
The financing rates can be prime to prime plus 2 and the outstanding balance is always open to repayment without penalities.
Higher income home owners with good credit would likely qualify for this type of low cost short term or bridge financing any time they wanted while others may not be able to pass the prepayment test for the combined first and second mortgages that will be registered against the property.
Depending on what you’re motivation is for securing a line of credit, there will be different strategies for applying.
Ideally, a home equity line of credit is a great source of contingency financing and cash reserve to protect your family and cash flow from unexpected events. But like most forms of low cost financing, it will be very difficult to secure if not impossible at a time when you really need it if the your circumstances have strained your credit and/or reported earnings.
If this is your motivation to secure a home line of credit, then the best time to apply is simply when you would qualify.
That may sound a bit strange, but its also the nature in which financial institutions grant approvals for prime or prime plus financing.
As an example, if there are two working home owners, each with a good paying permanent job and good credit, the prospects of applying for a secured line of credit on a property that has available equity would be likely be very high.
But if one of the home owners was laid off and the family as a whole was struggling with managing cash flow for a period of time, it would be unlikely that a secured line of credit would be approved at that point.
The same is true of the self employed. You will have greater success applying for secured and unsecured lines of credit right after a good year, whether you truly need the money or not.
Once you have the secured line of credit in place, you can use if for whatever you like. So if there is a time when additional funds are required, for whatever reason, you will have a financing reserve system all set up.
And as long as the balance on the line of credit sees movement up and down over time, you’re not likely to have any issues with the bank. If you are sitting at the maximum amount of the line for a year or more, they may review your account and even reduce the line. But even if that came to pass, you would still likely be able to easily term out this second mortgage due to the fact that there is still at least 20% equity in the property and the available funds have likely helped protect your credit.
The current recessionary period only reinforces the need to have a some sort of financing back up plan to deal with the unexpected and unplanned and a home equity line of credit can be a great way to accomplish that.
While the home equity loan programs from traditional lenders such as banks have some variation among the different programs, most of the criteria for qualifying are very similar.
The main distinctions made within these mortgage programs by institutional lenders relates to the subcategory of borrower. Once an applicant determines which sub class they fit into, then the rest of the related lending criteria can be identified.
More common subcategories include Salaried Applicants, New Immigrants, and Self Employed.
For salaried applicants where the borrower cannot confirm all their income available for mortgage payment servicing, the traditional lenders will consider a maximum loan to value of 50%. The minimum 50% down payment as well as the closing costs need to be confirmed prior to the advancement of funds. There can also not be any secondary mortgage charges placed on the property without the prior written consent of the lender.
To qualify as a Canadian immigrant, the home equity mortgage applicant must have landed immigrant status or proof from Immigration Canada that an application has been made and received. The credit profile of this sub category must be supported by an international credit bureau, a letter of reference issued by a banking institution from their country or origin, or proof of cash deposits large enough to cover the required down payment and at least 6 months of scheduled debt serving payments and property taxes. The maximum loan to value tends to be 65%. For new immigrants to secure loan to values up to 75%, the applicant must further provide evidence of liquid assets equal to at least 50% of the total purchase price of the property.
A Home equity loan for the self employed requires the applicant to have a credit score of at least 720, have no previous personal bankruptcies on report, a minimum of three years credit activity reported on one of the major credit bureaus with at least three different trade accounts, and at least two sources of third party verification that the applicant was indeed self employed for a period of at least 3 years. The loan to value for qualified individuals can go up to 75%.
Once again, please keep in mind that the above serves as a generic guideline and should no way be viewed as the specific requirements for all institutional lenders providing home equity mortgages.
If you’re considering a home equity mortgage, or would like to know more about them, I suggest that you give me a call so that we can go over your options together and decide on the best course of action for you and your family.