Canadians with mortgages have significant equity in their homes, averaging about 66 per cent of the home’s value, according to the Canadian Bankers Association. For those who are struggling with paying their bills, using their equity in their homes may seem like a reasonable method to find the funds to help pay off their debts.
A home equity loan provides a one-time lump sum that gets paid back monthly with a fixed interest rate within a specific time frame, usually 10 to 15 years. The adjustable interest rate is usually lower than credit cards, and is usually tied to the prime lending rate. It provides access to funds that you pay back like a credit card, with a minimum down payment.
By borrowing money against the equity of your home, you are using your home as collateral against your debt.
How do you know who much equity you have in your home?
Home equity loans are based on the increased market value of your home. Here is the formula:
Value of Your Home – the Amount Owing on Your Mortgage = Home Equity.
For example, if you bought your home 20 years ago for $250,000 and have paid $100,000 toward your first mortgage; the amount owing is $150,000. Meanwhile, in the last two decades, the value of your property has gone up, and it’s now worth $700,000. So $700,000 minus $150,000 equals home equity of $550,000.
However, you cannot borrow $550,000. Recently, the federal government has put a cap on the amount you can borrow in an effort to control consumer borrowing.
How much can you borrow?
Canadians used to be able to borrow up to 80 per cent of the value of their home on HELOCs. Now the loan-to-value (“LTV”) ratio on new HELOC financing cannot exceed 65%.
How can a HELOC sink you deeper in debt?
Home equity loans are based on market value and are dependent on market changes. If the market goes in the dumper the value of your home decreases. You could end up owing on your home equity loan even after selling your home.
What’s worse is you run the risk of losing your home to foreclosure if you can no longer afford the required payments on your home equity loan. Should the house be sold, the proceeds from the sale will go to the creditors with outstanding balances. Any money left over will be yours, but it will likely not be enough to secure a new home. You’ll have to start all over again worse off than how you started.
If there was another way to resolve your debt without jeopardizing the shelter over your head for you and your family, wouldn’t you consider it?
For more information about the different options to resolve debt, call OCCA Consumer Debt Reliefto see how we can tailor a debt relief plan to get your debts paid off WITHOUT binding them to your home..
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