It may be easy for a lot of homeowners to apply for a second mortgage but those who have an existing HELOC may have a bit of a challenge. A few months ago, the leading HELOC provider in Canada, Toronto-Dominion Bank changed their rules for those applying for a second mortgage. Part of their new changes is that they now require people with a HELOC who are applying for second mortgage and other financing methods to prove that they can pay. The proof that they want is not based on the actual balance rather it is based on a theoretical monthly limit. A lot of lenders are now implementing this change including the Royal Bank of Canada.
Industry experts think that the change discussed above is going to have a significant impact on both rental and second home markets as well as may affect those who want to borrow money using their home equity.
One Small Step Equals Huge Changes
With the above, getting a new loan or another second mortgage means that the borrower will be subjected to a stress test – a test that will determine what credit limit can work for you for a HELOC. The lender will add an assumed payment (that is based on the government’s benchmark) to your application and determine your capacity to pay from there. This means that when you decide to get a HELOC in 2019 onwards, banks will subject you under a stress test. This will not affect those who will be renewing their mortgage. This is only meant for those who have an existing HELOC and wishes to get another second mortgage.
What the Numbers Say
With the above changes, someone who has a HELOC of $200,000 need to prove that he or she has the capacity to pay $1,202 per month based on current rates. This will no doubt negatively affect those who are turning to a second mortgage for financial elbow room. The good news is that it looks like only major banks are going to implement the new policy for 2019, which means that other lenders may be more forgiving and easier to borrow from.
Is This a Sign of Bank Hypocrisy?
It is difficult to say but the fact is, the banking industry generates a lot of income from HELOCs to the point that borrowers are actually offered a HELOC without even applying if the bank deems them to be credit worthy. It seems to be an unfair system when the bank persuades you to get a HELOC and then proceeds to fence you in once you’ve signed up for it. The situation is as such that renewing a mortgage or even switching from one bank to another comes with a lot of challenges. Note that banks often push for the maximum HELOC amount when a borrower files an application, a practice that some industry insider deem shady because it serves to trap borrowers in debts that they don’t truly need.
Is There a Solution?
If you have an existing HELOC, applying for a second mortgage from private mortgage lenders and other institutions might be a better option than trying to borrow from banks. Contact us and let’s discuss what financial options may work for you.