Did you know that Most People have the wrong type of Home Equity Line of Credit and they dont even know it……
And this may be causing them to lose opportunities, costing them time or money. You dont know what you dont know
So, you have a house with equity and you want to access that equity. The best thing that you can do is to get a home-equity line of credit (HELOC). Although you can receive conventional financing up to 80% of the property’s value (currently in Canada), the HELOC portion limit is limited to 65% of the value of the property. Yes, you can only access up to 65% as a credit line portion of your entire mortgage. You can get a HELOC from virtually any bank as most lenders offer this type of product. So why not just go anywhere to get it?
Despite what you may think and what your bank is trying very hard convince you of, banks products are not the same across the board. In fact, they can be very different. Even a simple product such as the home equity line of credit.
The sad reality is that the average consumer isn’t aware of this. Even most mortgage brokers and financial planners are not aware of this either .
Why IS that you may ask?
According to my good friend, Sua Truong, who is not only a colleague of mine but somewhat of a mentor as well. In fact, Sua is the one who that actually brought this to my attention……WHY is the answer.
Are you confused yet?
Let me explain.
Most people go to the lender to get the HELOC and never ask the right question.
The advisor or banker never asks the client the right question either.
Here is how the conversation usually goes:
Banker/advisor: What can I help you with today?
Client: I would like a HELOC.
Banker: Okay, let’s get started.
If the client had been asked themselves WHY they need the line of credit in the first place and if the advisor had asked them how they would like to use the money now and in the future.
A more suitable type of HELOC option may have been presented instead of one that acts just like a lower interest personal line of credit.
Sua likes to quote Tony Robbins ” when you ask better questions you get better answers.”
Not all HELOC’s work the same. They have different features/benefits.
There are 3 main types of HELOCs:
- Standard HELOC
- Re-Advanceable HELOC (great for the Smith Maneuver)
- ALL in One HELOC
Each type of line of credit has its advantages and disadvantages.
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The Standard HELOC
is what most people tend to get. A standard line HELOC behaves the same as a personal line of credit. No bells or whistles except a lower interest, and maybe an interest only repayment feature.. When you use up the limit, that’s all you get until you pay it down.
Even this type of HELOC at one bank is not the same at another. One lender for instance will allow you to separate the HELOC into 5 or 6 components while others can give you up to 99 or more.
Why would anyone want separate components? Well, some people use the money for different things and being able to separate into different components allows you to keep better track.
For example, Loaned 10k to sister,
Joint venture investment with Tom,
Loan to business to purchase vehicle.
This set up would make life a lot easier for income tax purposes. Especially when you are using portions of your HELOC on your primary residence to invest in several properties.
With this type of product, you have the ability separate each one so that you can keep track of the expenses for the correct property.
You do want to build passive income from many properties, don’t you?
Hopefully you are beginning to see the benefits of the right HELOC. Moving on..,
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Re-Advanceable HELOC
Most people have a fixed mortgage portion (or component) and a revolving (line of credit) portion on their home. In order to best illustrate the difference, let’s look an example. You have a $1M property, of which $400K is a fixed mortgage portion and another $400K revolving portion. As the mortgage portion is paid down each month (principal and interest), the amount of principal that is paid down will increase your revolving limit. For example, if $2000 is paid each month and the principal portion is $1,000; then your line of credit limit increases by $1,000. At the end of the year, you should see your limit increased to $412,000. The main benefit with this type of product is that you have an immediate access to funds that you paid down without refinancing and requiring legal expense to increase the credit limit. This type of option works best when you have a “collateral charge” on your home that is equal to or greater than the current value of your home. As your property increases in value, you can gain access to more equity that is building up just by providing an appraisal of the increased market value. Most of the time, a financial adviser will recommend this type of setup for you, and discuss implementing the Smith Manoeuver. The biggest drawback for this type of set up is it makes it difficult to obtain any type of secondary financing as the debt registered on your title will be higher than what you have currently borrowed or have access to.
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All-in-One HELOC
is an interesting product that has all the features of the readvanceable HELOC and mortgage combined, all set up just like a chequing account that will allow you to do ALL your daily banking (pay bills, e-transfer, debit access etc.) and deposit your pay into it. This simplifies your life by not having multiple accounts for chequing and credit line. In theory, if you get paid bi-weekly, the deposits go directly to your mortgage and therefore pays down your outstanding balance faster. Since your bills are only paid near the end of the month, you have 2-3 weeks of your hard-earned money “temporarily” paying down your mortgage. Of course, paying those credit card bills and month end expenses will push the outstanding balance back up again.
That is true. However, in theory the 3 weeks or so that you deposited money into would have reduced the interest accrued during that time.
The drawbacks to this type of HELOC are:
- seeing your debt go up and down like a yo-yo can take a toll on some borrowers
- most lenders will charge a monthly fee (just like a daily banking account)
- it is difficult to separate and keep track of what money was allocated where ( can be a nightmare for accountants)
- refinancing it would be very inconvenient since your payroll deposits and pre-authorized expenses (PAD etc.) have been directed into and out of that account
As you can now see hopefully, there’s more to a HELOC than just a line of credit. Getting the wrong one will limit you down the road, potentially creating more work for you and limiting your ability to take advantage of opportunities.
On top of these differences, some lenders even offer preferential rates to certain types of professionals (but only if you ask about it).
By using a financing expert, you can avoid making these costly mistakes and get access to the best products available in the market.
Feel free to contact me for a complimentary consultation to find the right product to fit your financing strategy.
