By – Robb Nelson

Loans secured against your home have been the hot product for a while now at all major lenders. They are presented in the form of a HELOC, or Home Equity Line of Credit, and are frequently how lenders will suggest you finance any major loan whether it be to send your kids to school, renovate your home, or purchase a new car. For people who are getting a new mortgage, lenders like to suggest a hybrid mortgage that incorporates a HELOC in with a traditional mortgage so, as the balance on the loan reduces, the amount you can borrow on your HELOC will rise. Now the question here is: Is this a good idea?

People look favourably at HELOCs because they are easy to get if you have a good amount of equity in your home and have a decent credit history. They work in the same way that a credit card does where you are only paying interest on the amount that you owe, and the upside is the interest is much lower that you would receive on a credit card. HELOCs are also less expensive than getting a personal loan because, from the lender’s perspective, the collateral is already there in your home and they vetted you when you applied for the mortgage so they are usually confident that you are able to pay that amount back. HELOCs also make it easy to access the funds, whenever you need you have the ability to write a cheque or use a credit card associated with the line of credit.

Now this all sounds like a pretty good deal, right? You are going to use a line of credit that has a low interest rate, is easy to access, and you can use the funds for whatever you want. However, you have to be very careful when dealing with HELOCS. What’s the limit on your credit card? On average, people usually have it at between $5,000.00 and $10,000.00. Why not more? Why don’t you have multiple credit cards reaching into the tens or hundreds of thousands of dollars? It’s because it’s too much credit, too much money to have at your finger tips without the need to actually being able to afford the purchases you’re making. The reason that you go into a lender to ask for a loan for a major purchase is not solely because they are the ones with the funds, it’s because they are the ones who can advise you what you can actually afford to pay back.

As mentioned before, when you get a HELOC or your mortgage is a hybrid mortgage where a HELOC is blended in, one of the advantages is that the lender is confident you can pay back because it is secured against your home. Having a loan secured this way is a double-edged sword because if you default on the HELOC you could lose your home. This makes it extremely important to make your payments on time. The interest rate on such debt is also variable so there is a possibility that, if your home value falls, you could end up owing more than your home is worth. This is known as being “upside down” or “underwater” and it means that you will not be able to refinance the mortgage and selling your house will be much more difficult. Finally, far more often than not, when a HELOC payment schedule is drawn up they only ask that you pay the interest on the loan. This means that the principle is not getting paid off and your debt will keep growing and growing, all the while not paying down your mortgage.

The bottom line is that a HELOC is basically a large credit card that allows you to make major purchases without needing to consider your ability to pay it back. Having a process that is needed to go through in order to acquire any significant loans is an important step as it stops you from getting in a financial situation that you are unable to get out of.

Tips on Buying a New Home

Home buying is an important personal decision and a big financial investment. You want to find the home that’s right for you and the builder who provides the best overall value and service. Home buyers and professional home builders agree there are a number of things you can do to make the buying process enjoyable and successful.

Do your research.

Know what you want, what’s available and how the buying process works before you start thinking seriously about signing a contract. Browse through newspapers, magazines and industry/government publications. Consult with family, friends and co-workers. Attend consumer seminars and check the Internet. Most importantly, visit model homes and talk with builders and salespeople.

Pre-arrange your mortgage.

If you plan to borrow funds to finance your home purchase, talk to your lender about mortgages early in the process. Knowing in advance how much you can spend comfortably and getting pre-approval for a mortgage means you can proceed from “just looking” to a signed contract with confidence.

Check the builder’s qualifications.

There are many reputable, professional builders in the industry who provide great homes and great service. As you talk with builders or their salespeople, ask a few questions: How long has the company been in business? Is it a member of the Canadian Home Builders’ Association? Will the builder give you references? What after-sales service does the builder offer? Does the builder supply a Tarion home warranty and what does it cover? “Personal fit” is also important: Does the builder (or salesperson) listen to you? Understand your needs? Offer useful advice? Do you feel confident that the company would be good to work with?

Check the home carefully.

Whether a builder has a model home, a sales office or sells directly from drawings and plans, you’ll have plenty of opportunities to look closely at the quality of the builder’s home and what’s included. The builder’s “spec” list will detail the construction materials and finishing products. Ask to see a description, and samples, of the standard features included in the base price of the house, along with the description and cost of options the builder offers. When viewing a model home, don’t hesitate to try out windows, open drawers and look into every nook and cranny-the builder wants you to be convinced of the home’s quality and solidity.

Understand the total cost of buying.

Get detailed prices and estimates on everything involved in buying a home. Your builder and lender can advise you on the costs of securing a mortgage, taxes and so on. Ask your lawyer to give you a detailed breakdown of closing costs, including land transfer taxes where applicable. Call movers for estimates. Determine if you need to buy new appliances, window coverings or furnishings.

Bloomberg News

October 31, 2018

Twenty per cent of refinancing for mortgage deals in the second quarter were funded by private lenders, a 67 per cent jump from the first quarter of 2016, according to a report Tuesday by Toronto brokerage Realosophy and property data provider Teranet.

Purchasing homes and paying off mortgages are getting harder in Canada’s biggest city due to a combination of rising interest rates, higher home prices and tougher standards to qualify for a mortgage. The new rules require borrowers to prove they can make payments at higher rates and apply to new mortgages as well as refinancings or transfers to a new bank

The changes are a boost to private lenders, which are willing to take on riskier financing arrangements than traditional lenders. In turn, they charge higher interest rates, the report said. The share of mortgages financed by private lenders has increased from a low of 12 per cent in 2016 to 20 per cent in the second quarter of 2018.

Most of these lenders are mortgage brokers who have set up mortgage investment corporations to raise money for lending, John Pasalis, president of Realosophy said in an email.

Total private mortgage volume jumped to $1.5 billion in the second quarter, from $920 million in the first quarter of 2016, the report said. Almost half of private lending activity during that period was on detached homes that were refinanced; the next highest segment was for condo refinancing.

Generation Xers, or people in their 30s and 40s, were the largest group of consumers turning to private lenders, accounting for 42 per cent of all transactions, according to the report. A portion of this increase may be driven by owners who prefer to do major renovations to existing homes rather than moving to a bigger house, the report said. Private lenders are often more willing than banks to provide construction financing.

–With assistance from Erik Hertzberg.

Sarah Niedoba

livabl.com

As fall draws to a close and the new year approaches, plenty of industry experts are making predictions about what 2019 will have in store for the Canadian housing market.

This year saw housing activity take a major plunge, following the introduction of stricter mortgage qualification rules in January. While sales and prices have warmed up since then, there are still several factors that could rein in the market come 2019.

Here are some predictions for what the market might look like in the new year.

The Toronto housing market will keep warming up

While the Vancouver housing market has had a particularly rough year, the Toronto market has been posting month-over-month sales and prices gains for months. Many experts believe the city has largely adjusted to demand-based policies, including the Ontario government’s Fair Housing Plan, which took a serious bite out of the market in the spring of 2017.

In fact, Royal LePage has predicted a 2 percent price bump for the GTA in the final quarter of 2018, a trend that it says will likely continue in the new year.

“There will likely be continued price growth in the GTA, backed by strong household formation in the area,” Phil Soper, president and CEO of Royal LePage, tells Livabl.

A lack of supply amidst continued strong demand is often cited as the reason for sustained price growth in the region. But while prices should continue to move upwards in 2019, higher interest rates will likely prevent them from reaching the growth levels seen in 2017.

“I think prices in the GTA are headed in a healthier direction, moving into 2019,” Royal LePage Signature Realty sales representative Cam Woolfrey tells Livabl. “They will continue to move upwards, but not at the pace we were seeing a year ago.”

Key markets will continue to outperform

The past year has been full of surprise success stories for the housing market — cities that have long been overlooked by Canadian real estate-watchers had banner years, posting record sales and price growth.

Cities like Ottawa and Montreal saw activity surge, as their lower price-points meant that they were able to largely dodge the effects of stricter mortgage rules, while buyers flocked to their strong job markets and relative affordability.

Leading the pack was Hamilton, a market that many experts predict will continue to see strong price growth in 2019, as those unable to afford nearby Toronto look for a more reasonably priced option.

“When you look at the current success of the Hamilton market, it isn’t something that’s going to go away anytime soon,” Hamilton-based realtor Mike Heddle tells Livabl. “People are looking for a place with job opportunities, where they can afford to live. That’s going to be a strength in the new year.”

Rising interest rates will put a damper on activity

The Bank of Canada (BoC) raised the overnight rate to 1.75 percent this month, in what many industry watchers are calling the beginning of a more aggressive period of interest rate hikes.

The reason? Interest rates have been historically low ever since the 2008 financial crash. Now, the BoC has made it clear that it believes Canadians can handle higher rates.

But what does that mean for the country’s housing market — well, as interest rates rise, so do mortgage rates. Higher rates, combined with stricter mortgage qualification rules, could keep many would-be buyers on the sidelines in 2019, placing a downward pressure on activity.

In fact, according to Andrew Carbacho-Burgos, an economist with Moody’s Analytics, 2019 could be the start of a 5-year period of slower home price growth. He believes the BoC will continue to tighten interest rates through to 2020.

“It is possible that rising interest rates, combined with new rules around mortgage credit, could lead to a decline in sales in the coming year,” he tells Livabl.