An increasing number of homeowners currently has a HELOC so the question is, is it still possible to get a second mortgage if you already have an existing HELOC? The fact is, that may be a big challenge considering the recent changes for second mortgages implemented by Canada’s leading HELOC provider, Toronto-Dominion Bank. Whereas homeowners only needed to prove that they have considerable home equity before, now they have to prove that they will have no trouble paying another second mortgage on top of having a HELOC. More so, banks like the Royal Bank of Canada now require that homeowners meet a theoretical monthly limit and not just prove that they have a stable income source.
According to industry experts, the change above will have a huge impact on both second home and rental markets as well as everyone who wants to borrow money using their home equity.
Stress Test and Big Changes
With the new changes in place, getting a second mortgage or a new loan means that the borrower will have to undergo a stress test. This is a test that will set what credit limit may work for you considering you have a HELOC. The lender will account for an assumed payment (which is based on government benchmark) when processing your application and use that to determine your capacity to pay for the loan you’re applying for. This is something to consider if you’re applying for a second mortgage, a HELOC, or any other type of home equity loan for 2019. Just to be clear, those who are planning to renew their mortgage won’t be affected, only those who have a HELOC and plans to get a second mortgage too will be subject to this.
How Things Are
Numbers are the best indicators as to how things will be. With this change, someone who has $200,000 HELOC has to prove that he or she is able to pay $1,202 per month, leaving little room for those who are planning to get a second mortgage from banks and are not in a very good financial position at the moment. The silver lining in this development is that private lenders generally do not have to follow this new policy and thus, will be easier to borrow from.
Some industry insiders say that this is a sign of bank hypocrisy. After all, they usually offer and approve HELOCs for their clients without even needing an application. It seems that the same HELOC that the banks persuade their clients to get is now a financial limitation unless someone is really well to do. Considering that banks often push for the maximum allowable HELOC limit for borrowers, the practice may well be called a trap these days for what it does to borrowers who are now burdened with a loan that they don’t need.
Overall, things are looking up if you’ll apply for a second mortgage from private mortgage lenders instead of banks. Contact us and our mortgage professionals will be happy to walk you through the details of what borrowing option might be best for you if you have an existing HELOC.