Readvanceable Mortgage Option Failure Advances Risk for Over-Leveraged Homeowners
Even if you are not a savvy real estate investor you likely what the term ‘underwater’ means when it applies to someone who has recently made the decision to pay more than they likely should have when buying a home. There is risk to everything in life, but there have been literally hundreds of economists over the years who have been saying it is very much buyer beware given the fact that the market must eventually home values come down. A buyer will be underwater if they owe more on their new home than the home is worth, and that’s a very real concern with what is happening now in Canada.
The potential problem is very acute in the markets that always make the news, and that’s in the big metro areas where housing has been crazily in demand for a long time like Toronto and Vancouver areas. FOMO is the acronym for Fear of Missing Out, and this is what spurred so many recent homebuyers to make the choice they did and pay more than a home should be worth. It’s the fear that this would be their only chance to get in, and for what it’s worth this has been a profound trend in many other countries around the world over the last few years.
The agents that work with both homebuyers and home sellers need to be attuned to these trends, and as has been the case with every market cooling period ever seen there are fewer homes going onto the market too. Perfectly reasonable if you’re a homeowner who doesn’t absolutely need to sell at this time, but what it does is mean less of the proverbial pie to go around. If you’re a newer realtor you may need help gaining clientele, and it’s true that our online real estate lead generator here at Real Estate Leads is ideal for that.
But staying on topic track here, there was a recent proposal for a new mortgage product that might have helped over-leveraged buyers, but the Feds have made sure that went nowhere and we thought it might be helpful to provide an overview on it, and what might have been.
Combo Mortgage Product
So what exactly would a readvanceable mortgage be, and why did it get shot down?. It was one that combine a traditional mortgage with a revolving line of credit. As the homeowner paid down the principal, it would increase in size. The benefit would be in allowing them to immediately re-borrow, and do so even when the total loan goes past the 65% limit of the appraised value of the home.
Further, if that is to also include the amortized portion then homeowners would have been able to borrow as much as 80% of the value of their homes. The only caveat being that the amount would be minus any outstanding debt on the original mortgage. Sounds fairly reasonable, no? The only immediately apparent obstacle would be the risk of having homeowners in persistent debt.
That would certainly be the case if it required borrowers to pay both the principal and interest on any combined loan amount above 65% of the home’s value, and it’s here where the wheels started to fall off this proposal and reason #1 it was rejected at the Federal level.
Other Contributing Factors
Being able to borrow up to 80% of the value of homes by using advanceable mortgages repeatedly was certainly going to appeal to homeowners for any number of reasons, not the least of which would be the ability to buy additional properties and then either rent the unaffordable home OR sell it when the time is right.
Yes, a HELOC (home equity line of credit) accomplishes much the same, but the difference is immediately apparent because the owners would be forwarding their mortgage rather than borrowing against the equity in their home – something recent homebuyers likely wouldn’t have much of anyways.
But as it stands now here we are with the Bank of Canada aggressively increasing its benchmark interest rate to combat inflation, and the result being Canadians who continue to tap into their homes for cash could be left owning a small portion of their property when all is said and done.
Also factoring in here is how higher borrowing rates have put the housing market into a near freeze and house values are going down, considerably in some regions. Technically, lenders could require partial repayment if a newly-appraised house falls below the required value to cover the amount owed.
Last but not least, readvanceable mortgages might have been a good fit for those who have been damaged by making poor choices with their HELOC. Not the focus here for sure, but something that needs to be kept in mind. There certainly is merit to what the Federal Government has done here based on the unsteadiness of the move, but there needs to be an ongoing conversation about what sort of options might exist for people who have over-extended themselves buying a house.
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