Do you have a HELOC? Millions do. In fact one of every two dollars Canadians borrowed last year came as part of a home equity line of credit.
No wonder. These things turn your house into a bank. After most people (well, 70% of them) decided to stuff big amounts of their net worth into real estate, this was the next logical thing to happen. HELOC horniness. If you toil in a Home Depot, make granite or cement countertops or import Japanese toilets that squirt hot water on parts of your body you’ve never met, you should worship these suckers. But maybe not for long.
The reason? F and the peckerettes are at it again.
HELOCs scare these guys. They’re terrified you can walk into any bank and walk out with a secured line of credit representing up to 80% of the value of your home, and get it at prime – currently just 3%. This means every time house prices go up, there’s another little pot of paper equity which can be turned into real cash with a HELOC. There’s that new kitchen. The deck with a hot tub which can hold up to eight full-sized Amazons. The media room with speakers that melt heads.
And this is exactly what people have been doing – borrowing their buns off.
HELOCs have exploded 170% in the last decade, and the big banks now have almost $190 billion in outstanding home equity lines of credit on their books. It’s a massive part of the debt binge we keep hearing about, mostly because they’re so easy to get and cheap to own. HELOCs, you see, are not amortized – there is no decades-long term for interest calculation on which blended payments are based.
In fact, you can make interest-only payments for as long as you want, which means the cost of a $200,000 HELOC is a mere $500 a month. And if you use the money for a really smart investment, like buying a condo on which you will lose money every month, the interest is even tax-deductible.
In fact, home equity lines of credit have played a major role in setting us up for the coming condo implosion. This is exactly where an army of investment geniuses are getting the 20% they need to make Brad Lamb throb. After all, I hear you can buy a condo in downtown Toronto with $59,000 down and make 282% on your money! Hey, hon, let’s get three!
Enter the peckerettes.
Weeks ago the bank cop, OSFI, floated the idea that letting people drain off 80% of their equity to rack up more debt was insane. With real estate values at historic highs and mortgages at generational lows, the risk of a market correction was obvious. And look what similar behaviour brought in the United States. When people started ‘spending the equity’ that a crazy rising housing market brought by turning their homes into ATMs, well, it was time to stick a fork in. The middle class was done.
Now it looks like the feds will be acting. Soon the maximum amount people will be able to suck out with a HELOC will be 65%, and those folks with an outstanding loan for a higher LTV (loan-to-value) amount might be forced to amortize them.
This has brought howls of anguish from mortgage brokers. This comment was published in the evil trade mag, Canadian Mortgage Trends:
“Wow !! I’m flabbergasted at these knee jerk reactions of the federal government and the OSFI that are forced upon the banks. I honestly don’t think that Flaherty and his ¨Thinktank¨ in Ottawa have fully assessed the ramifications of these regulation changes. Most Canadians are in a ¨House rich, cash poor¨ situation. Where will people get their cash to pay for :renos, tuition, investments ?? If the govt doesn’t want a major part of the Canadian population to become a burden of the state in their old days, they shouldn’t cut off the valve on one of the few remaining cashable assets that Canadians have !!”
Will this have an impact? Probably so. After all, 15% of $183 billion in outstanding HELOCs is $27 billion, which represents one hell of a lot of vibrating Japanese toilets. And this home equity thing is just one aspect of the new OSFI regime. As I have been warning you since March, if the full reforms come into play, borrowers will face far more scrutiny about their personal finances, properties will be appraised more conservatively, homeowners will have to requalify for mortgage renewals and banks will be banned from handing out down payments.
See what a mess we’ve gotten ourselves into? I just wrote a whole damn post about equity lines of credit.
I am so ashamed.