Faster rate hikes, cooling home prices could put the squeeze on HELOC holders — via financialpost RealEstate Mortgages Finance
“Because HELOC interest rates are variable, rising interest rates could make the cost of borrowing much higher than when a borrower withdrew money,” said Michael Toope, a spokesperson for the“This could put pressure on a borrower’s ability to pay down the , while also having to manage other expenses.”Article content
Routledge, a former bank analyst and Finance Department official, cautioned that such “non-traditional housing-backed products can lead to greater and more persistent outstanding principal balances, increasing risk of loss to lenders.” The features have made combined loan products a popular choice, particularly with interest rates at record lows in recent years and no obligation to pay anything but the interest on most of the borrowing., combined mortgages and HELOC products grew to $710.3 billion at the end of last year, representing 41 per cent of total real estate secured lending. Their share rose from 37 per cent in the first quarter of 2019.
Falling house prices could lead to problems, he said, but not right away. First of all, there would be a 20 per cent equity buffer before borrowers were under water. And the problems would only materialize if they sold the home. The popular credit lines secured against a home can be used for large house-related expenses such as renovations, but there is no requirement to use the money for any particular purpose and balances are subject to prevailing interest rates. And while many borrowers don’t realize it, full repayment of the loan can be called any time by the bank, unlike a traditional mortgage.
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